Plan a Business
Finance Your business
Bank loans are considered one of the more traditional ways to finance a business. But due to market fluctuations and strict requirements, they are also some of the hardest loans to get approved. Often time a bank will require a potential borrower to have an alternate source of income, outstanding credit, a co-signer, or be able to provide significant collateral. Have a solid business plan to support your case, be persistent, shop around for the lowest interest rate, and keep in mind that you can also try other avenues, such as CDFIs.
In addition to carefully prepared business plans and financial projections, consider the 5 C's of Credit when approaching a bank (or any other entity) for funding:
Character (or credit history) - Refers to a borrower's reputation or track record for repaying debts.
Capacity - Measures a borrower's ability to repay a loan by comparing income against recurring debts and assessing the borrower's debt-to-income (DTI) ratio.
Capital - Lenders also consider any capital the borrower puts towards a potential investment.
Collateral - Collateral can help a borrower secure a loan.
Conditions - The conditions of a loan, such as its interest rate and amount of principal, can influence the lender's desire to finance a borrower.
While banks may be an obvious option when you want to secure financial support for your dream, credit unions can also be a useful resource. Compared to banks, credit unions may provide smaller loans, lower rates on loans, faster loan approval, free financial education, and more.
Using a credit union has several advantages, but it’s generally no easier to get business loans from a credit union than a bank. The approval criteria are similar. Whether you go to a credit union or a bank, you typically need to have a profitable business, at least 2 years of financial history, and a good credit score to qualify for business loans.
The US Small Business Administration (SBA) does not lend money. Instead, it backs loans provided by lenders that range from banks to community development organizations. The SBA guarantees that the loan will be repaid even if the business itself fails. The SBA also helps businesses obtain surety bonds and regulates Small Business Investment Companies that can help a small business partner with a venture capitalist.
Benefits of a SBA-backed loan:
SBA loans generally have longer terms than the loans businesses can obtain on their own. This is particularly important for new businesses. Many lenders will only give a new business a short term loan, a year or even less. Because this reduces the payments, it can make it easier for your business to qualify for a larger loan. Additionally, banks are not allowed to impose prepayment penalties on SBA loans. These loans are also fully amortized, meaning that if you need to renew the loan, there will be no associated fees and the bank cannot charge you for reappraisal of collateral or hit you with unexpected balloon payments
There are a variety of non-profit lenders that offer financing options to business owners. These lenders typically focus on small businesses that are community or mission-driven.
Many of these non-profit lenders focus on smaller loans of under $50,000. Because these lenders are mission-driven and targeting businesses with the potential to serve needs in a community, borrowers are often offered advice and mentorship to help the business owner maximize the value of the financing to his or her business.
PEER-TO-PEER LENDING / CROWDFUNDING
In the wake of tight credit markets, crowdfunding -- also known as crowdsourcing -- arose as a source to provide capital to startups, especially the creative types. This form of equity financing allows a company to raise funding through small contributions from a large group of individuals via an online platform.
Essentially, an entrepreneur makes an online pitch to a virtual audience, which then decides whether or not to support the venture by pledging money towards it.
Here's how it works:
An entrepreneur posts a description of his or her project, product or service, outlines the business plan, proposes the amount of capital needed, and explains what contributors will receive in return. Retail businesses sometimes provide product in return for the funds they provide. Other times, the entrepreneurs pledge cash repayment or they may offer an equity stake in the venture.
Should I be wary of alternative lenders?
While alternative lenders look at more than just credit scores, sometimes it will be necessary to work on your credit before you can qualify for a loan with one of these lenders. This will be especially true if you have serious delinquencies that have gone unpaid over time as this is a red flag for the lender. Business owners with bad credit and companies with poor track records of generating profits will still encounter difficulty with alternative financing programs. Even though small business lenders understand the challenges of the marketplace, owners must deliver solid plans for growth to qualify for favorable terms. Predatory lending companies have seized on the recent recessions to offer high-interest, short-term loans to business owners, not unlike payday loans. Unlike traditional factoring, annualized interest rates can rise into the triple digits, making repayment difficult. Instead, small business experts recommend setting stronger credit terms with customers or focusing on growing short term sales to generate cash flow.
Note: The City of Houston cannot and does not recommend specific lenders, but we encourage you to explore the resources provided below for more information on specific organizations, as well as other types of lenders.
Find additional business plan guides and resources below:
Do you need additional advice or assistance receiving capital? These organization may be able to assist you:
- Houston Business Development, Inc. (Non-Profit Lender)
- Frost Bank
- Lift Fund (Non-Profit Lender)
- PeopleFund (Non-Profit Lender)
- Space City Credit Union