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Financing Your New Business | Bank Loans, Credit, SBA Loans

Bank Loans

When you are just starting your business, you may find it difficult to obtain a bank loan. This is because many banks first want to see that you already have a profitable business with positive cash flow.

Banks will also want to see that you are able to repay your loans over time (e.g. you have a good credit history and/or sufficient personal equity), and that your business has been operating successfully for at least three years. Wells Fargo Bank, for example, prefers that your business generate at least $1.50 in cash flow for every $1 you pay out to cover expenses. They also want to see that you have not declared bankrupty within the last ten years and that you have no liens, suits or judgments against you or your business.

In some instances banks may look at business references or former employment to determine your creditworthiness, but usually they will require a credit record.

As a result, many new businesses are funded by credit cards, loans from friends or family, or personal savings. Some people will apply for a home loan and use the equity on their house to fund their business venture (called getting a "second mortgage").

Also be sure to look for local sources of funding from civic development agencies. Miami-Dade County and the City of Hialeah offer a number of funding programs for small to medium sized businesses, even those that are not eligible for bank loans or other credit. Click here to learn more about these programs.

Credit Cards

Whichever method of "seed capital" you choose for your business, it is crucial to establish a good credit record. Obtain a credit card or two, and establish a consistent record of making timely payments. Look for a card with the lowest possible interest rate and no annual fee. Major cards include Visa, Mastercard, American Express and Discover.

There are a multitude of banks that issue their own Visa and Mastercards with varying interest and fees. Compare cards before you obtain one, and be sure to read the fine print: make sure your card won't penalize you with an exorbitant interest rate if you miss your payment by a few days.

SBA Loans

If you have run your business profitably for a few years and are ready to expand, the Small Business Administration may be a good source of a loan guaranty. Ask your bank for a loan first; if they are unwilling to give you a loan, they may be willing to review your application if the SBA guarantees a portion of the loan through the SBA Loan Guaranty Program. The terms of this loan are generally five to ten years, or up to 25 years for assets like real estate or equipment.

SBA Interest Rates: Lenders may not charge over the maximum rate of 2.25% over the lowest prime rate for a loan period under 7 years; or 2.75% over the lowest prime rate for a loan period over 7 years.

What does the SBA look for in a prospective loan recipient?

  • repayment ability from the cash flow of the business

  • good character, usually indicated by consistent and timely payments to one's creditors and suppliers

  • management capability

  • collateral for the loan in the form of business assets like equipment

  • owner's equity (cash, IRA's, a house)

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Start My Own Business?

Choose a Legal Structure for My Business?

Write a Business Plan?

Finance My Business?

Lease and Locate my Business?

Purchase Business Insurance?

Arrange my Suppliers?

Obtain My Employer ID Number?

Obtain a Business Licence and the Proper Permits?

Learn About Business Taxes?

Keep Business Records?

Advertise and Promote my Business?

Hire Personnel and Contractors?

Learn About Labor Laws?