Starting up or maintaining a successful business is an exciting yet expensive endeavor to take on. Did you know that about 29% of small businesses fail because they don’t have enough money to run them?
Most business owners use their own personal assets to start up their business, which can easily cut into your personal living expenses. To mitigate that situation from happening, many entrepreneurs look to hard money loans and other types of bank loans.
If you want to learn more about hard money loans and other business loans that you may qualify for, you came to the right place. This brief business loan guide will cover all you need to know about the requirements needed to get your business the funding it needs.
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What Are Hard Money Loans?
Hard money loans are business loans backed by “hard” assets, which are usually real estate investment properties. These loans typically have short repayment times, averaging between one to two years.
Most businesses like to use hard money loans because of the application requirements. Hard money lenders focus more on the value of the property instead of the borrower’s credit.
Even though the application odds are higher, these loans come with costs. Lenders impose high-interest rates and shorter repayment times to mitigate their risk.
Hard money loans are more popular amongst real estate investors who need access to capital fast. Most of these investors use the money to fix and flip projects. Once they obtain financing, they remodel homes and put them back onto the market to sell. They repay their hard money loans and pocket their profits with the sale proceeds.
How Do Hard Money Loans Work?
Most traditional banks don’t offer hard money loans because these types of loans are not regulated. Instead, you will need to reach out to a private bank or private investor to get the loan.
Hard money loans have low loan-to-value ratios, which help the lender assess the risk. Traditional loans have high loan-to-value ratios of 80% to 90%.
This means that they will loan you 90% of the loan so long as you pay the remaining 10%. So if you wish to purchase a home for $200,000 with a 90% loan to value ratio, you will need to put down $20,000.
With hard money loans, the ratio is much lower; sometimes, it can dip down to 65%. This means that you will have to put more money down to secure the loan.
How to Get a Hard Money Loan
As mentioned earlier, hard money loans aren’t regulated like traditional loans. Unlike traditional brick and mortar banks, hard money loans don’t make their underwriting decisions based on your income, credit history, or annual revenue.
Before you sign any contracts with any lenders, make sure that research their business. Because they are unregulated, hard money lenders can set their own rules and requirements criteria.
Some lenders impose unrealistic and unfair practices to keep their borrowers in debt. These lenders practice predatory lending.
Crowdfunding to Finance a Business
Crowdfunding is another way to finance your business, but instead of applying for a loan and meeting requirements, people read about your business and pitch in money. Crowdfunding uses social media and crowdfunding websites to bring entrepreneurs and investors together.
If someone sees your business idea in a forum, they can reach out to you to ask you more about your business. If they have interest, they can invest as little as $10, or they can invest hundreds of thousands into your concept.
How Does Crowdfunding Work?
Before starting a campaign, you will first need to choose a platform to host it on. You can create a page on Kickstarter or Indiegogo.
Each website has its own rules and regulations on how much money you can raise and when you can access those funds. If you don’t meet your goal by a particular time, most websites will release the funds you raised back to the investors.
Even if you do meet your goal, you may have to pay fees for using these websites to host your campaign. Be sure to check out the terms and conditions of the website before you commit to using them.
Business Line of Credit
Business lines of credit provide businesses with access to money that they can use for any type of business expense. Unlike a business loan, you won’t receive a lump sum of cash. Instead, you will receive a credit card or blank checks to draw the money from your account.
Business lines of credit are subject to credit checks and annual income reviews. Just like a revolving credit card, you will have to pay interest as you draw funds. As you pay down the balance, you will have access to more money again.
Unsecured vs. Secured Lines of Credit
Your business line of credit will most likely be an unsecured debt, which means you won’t have to put up collateral for approval. Instead, the lender will focus more on your debt-to-income ratio, annual income, and credit score. Most unsecured lines of credit start at $10,000 and go as high as $100,000.
Secured Lines of Credit
As you may have guessed, secured lines of credit require you to put up collateral. Loans greater than $100,000 typically ask for collateral to secure the loan. You may need to get a certificate of deposit or a blanket lien on your assets.
Invoice Factoring
Businesses such as trucking and wholesale that deal in physical goods often have to wait 30, 60, or even 90 days to get paid by their customers.
This can create a real cash flow problem, as the company needs to pay its own bills and expenses long before it sees any revenue. Invoice factoring is a way to solve this problem.
Essentially, the trucking company sells its invoices to a factoring company at a discount. The factoring company then pays the trucking company immediately, giving it the cash it needs to keep operating.
When the customer eventually pays the invoice, the factoring company keeps the difference between what it paid the trucking company and the amount of the invoice.
Trucking companies and other businesses that use invoice factoring can get the cash they need to stay afloat without having to take on debt or sell equity in their business.
SBA Loans
Popular to contrary belief, SBA loans aren’t loans provided by the Small Business Administration. Instead, the SBA partially guarantees these loans, and participating lenders administer the loan. You can use these government-backed loans to cover expansions, startup costs, real estate acquisitions, etc.
You apply for SBA loans through a lending company like a credit union or a bank. As long as you meet the SBA’s lending standards, the lending institution will send your application to the SBA for final review and approval.
Standard SBA Requirements
Regardless of your loan program or SBA lender, you will need to meet a standard list of requirements. For example, your business must be for-profit, operating legally, and officially registered. You also must operate your business in an eligible industry.
Business industries ineligible for SBA loans:
- Firms involved in lending activities
- Churches
- Other religious organizations
- Gambling
This list is not inclusive of those who cannot qualify for SBA loans. You can check out this resource here to see the other industries that don’t qualify.
Your business must also have a need for financing, proof you tried to get funding elsewhere, and a sound business purpose for how you plan to use the money. Finally, the SBA wants to see that you invested equity in your company. You must show proof that you put time and money into your business.
SBA Underwriting Requirements
The Small Business Administration does not have numerical minimums for evaluating your creditworthiness. Instead, they look at you and your business holistically.
Personal Credit History
You will need to have a good credit score, around 690 or higher, to have a better chance at qualifying. Again, the SBA does not have a specific credit score minimum, so you may have some flexibility depending on the lender you work with.
Business Credit History
In most cases, the SBA uses FICO small business scoring services to evaluate your business credit history. To pass their prescreening process, you will need a score of 155 or higher. The FICO Small Business Scoring Services have scores ranging from a low of 0 to a high of 300.
Time in Business
Although there are some lenders who work with startups, most SBA-approved lenders require you to be in business for a set amount of time. Most need you to be in business for at least two or more years before considering your application.
Small Business Grants
If you don’t have enough business credit or you don’t meet the required minimums for business loans, you can apply for business grants. Several different organizations and private investors have grants you can apply for. Some focus more on women-owned or minority-owned companies, whereas others only focus on businesses in specific industries.
There are COVID-19 relief programs and research and development small business grant programs through the SBA. It is important to note that the Small Business Administration does not provide grants to start up or expand an already established business. Instead, they focus more on providing grants to nonprofit, educational, and resource partners that support entrepreneurship through training and counseling programs.
If you receive an email from someone stating they want to offer you a grant from the SBA, be sure to check where the email came from. If the sender was not from an email address ending in @sba.gov, you should report them. Many cybercriminals prey on small business owners who need money to sustain their businesses.
Protect Your Business’s Bottom Line
To prevent your business from going completely bankrupt, you will want to develop a thorough financial business plan. Take a good look at your current cash flow and expenses to ensure that you have more than enough to keep your business up and running.
In the event that you need to get additional funding, you have several different options, including hard money loans. To avoid going down the route of applying and managing loans, you can consider business lines of credit or small business grants. If you found this article helpful and want to learn more about ways to improve your bottom line or save on taxes, check out our blog!
Now that you read our article, “Hard Money Loans and More: The Best Financing Options for a Business”, Continue reading our article on how you can save taxes by reading our Tax Articles.
