Questions and FAQs

Many small business owners are surprised if a lender asks for a personal guarantee when they apply for a business loan. Most lenders require personal guarantees. Simply put, it reduces the lender’s risk associated with the loan.

A personal guarantee is a legal contract requiring an individual, typically an officer or owner of the business borrowing money, to personally repay the loan in the event the business is unable to do so.

Lenders will generally require personal guarantees when they determine the business is unproven or lacks collateral to otherwise qualify for the loan. At other times lenders require a guarantee simply to confirm that the entrepreneur is on the same page and strongly motivated to help the business succeed.

Because this is a standard practice for most lenders that offer loans to small businesses, it is nothing to be alarmed about. Small business lenders understand in many cases, that there is a relationship between the financial health of a small business and the financial health of the small business owner. Ask yourself this question. If you are not willing to take some risk for the loan to your business, why should the lender?

Fortunately, even though you may have to personally guarantee your businesses financing, we have many funding options available that report only to the business credit bureaus, not the personal credit bureaus. So, as you are accessing and utilizing this capital, it is not affecting your personal credit score.

Before you seek any funding, determine what you need the funding for and how much will you need. Why? When a lender asks the question, “how much are you looking for” and your reply is, “as much as I can get,” your answer tells a potential lender that you haven’t really thought through your loan purpose. Your loan purpose should drive the answer to this question. Not knowing how much you need and why is a red flag to a lender. 

As a business borrower, you need to have realistic expectations. Whether you are approaching a traditional lender or an alternative lender they both have the same primary concern. Simply stated, “the lender’s primary concern is whether your daily operations will generate enough cash flow to repay the loan”. 

 Loan amounts and interest rates are determined by the amount of risk the lender will take. Alternative finance lenders have a higher risk tolerance than traditional lenders such as banks and credit unions. 

 Do not make the mistake misinformed borrowers make by comparing 30-year mortgage rates with business loan rates. That is like comparing apples to oranges. Business loans carry much more risk than a home loan. Some of the lowest business financing rates available come from banks with an SBA guarantee attached. As of July 1, 2020, SBA 7(a) Loan Rates range from as low as 6% to 8% and SBA Microloan Rates from 6.5% to 13%. Alternative finance lenders have rates as low as 6% and as high as 30% or more depending on the type of capital requested and the risk determined. Business loan rates constantly change. An average business loan currently is 9%-13%. Interest rate levels are a factor of the supply and demand of credit: an increase in the demand for money or credit will raise interest rates, while a decrease in the demand for credit will decrease them.

 The cost of capital is simply the return expected by those who provide capital to your business. You the borrower must determine whether the cost of capital presented will give you an adequate return on investment (ROI). What you are going to do with the capital is as important as where you are going to get the capital.    

 The exact loan amount you are eligible for, the term length and the interest rate can only be provided to the borrower after the lender has reviewed all requested documents required to make an informed decision. The documents requested are different for each lender.

Alternative business lenders are non-bank financing companies that offer nontraditional financing options to businesses that are unable to get approved for financing from banks, credit unions and other traditional lenders. 

One of the biggest factors differentiating funding from a bank vs an alternative lender is your personal credit score. Every bank’s credit score requirements are different but on average a bank will require a credit score of 675 or higher. By contrast, many alternative lenders carry a minimum credit score of 500.

 Most traditional banks will require a minimum age of business of 2 years, preferably 3 years of operations, while most alternative lenders require only 12 months in business and often less.

Most alternative lenders are willing to look past a low credit score and short time in business because they place more emphasis on the health of your business. 

 Specifically, alternative lenders want to see if the cash flow of your business can support repayment in the short term. 

 Banks offer lower rates and longer terms because they do not expose themselves to much risk. Alternative lenders, on the other hand, are willing to take on more risk conventional lenders will not.

A term loan is a lump sum of capital that you pay back over a specific time period (or term) with a set interest rate. This type of financing is best for specific, one-off expenses like purchasing inventory, refinancing existing debt, or opening a new location. Keep in mind, term loans can also come with fees besides interest, including origination fees, packaging fees, prepayment penalties, and so on.

A business line of credit is one of the most flexible financing products on the market. While they do not have hard-and-fast term lengths like term loans do, typically you may have between six months and three years. A line of credit gives you access to a pool of funds from which you can draw against for any business-related purpose. You only have to repay the funds you use, plus interest. Lines of credit are best for ongoing operating expenses or an emergency fund. As with term loans, you will want to make sure you understand all of the fees associated with your line of credit. Depending on the lender, you may be subject to draw fees, inactivity fees, withdrawal minimums and more.

It will depend on what type of capital you are seeking and whether the funding is coming from an alternative finance lender or a traditional lender. 

Depending upon the lender it could take anywhere from a day or two to several weeks, or even months. For example, a loan from the bank (or an SBA loan) may take weeks to go through, while a loan from an alternative finance lender tends to be finalized within a few business days. Depending upon your loan purpose and how quickly you would like the capital, there may be some lenders you weed out early in the process because their typical approval process just takes too long.

Fortunately, there are alternative finance lenders who are able to offer a quick decision, where if you are approved, you can have funds in your account sometimes as quickly as within 48 hours.

Whether you are looking to purchase real estate your business will occupy, buy an existing business, cover construction costs, or obtain working capital, an SBA loan can provide the funding you need for your business. But not all businesses are eligible for an SBA loan. SBA loans are bank loans with government guarantees. Every bank has its own lending requirements. If you qualify for a bank loan, you have a good chance of qualifying for an SBA loan.

The SBA guarantees between 50 and 90 percent of the loan should it go into default, which encourages the banks to lend to small business owners with preferable rates. Thanks to this relationship between the SBA and lenders, entrepreneurs can obtain financing to buy or expand their small businesses with affordable repayment terms and low interest rates.

The following types of businesses are ineligible for SBA financing:

• Non-profit businesses (for-profit subsidiaries are eligible).
• Real estate investment businesses (considered speculative).
• Financial businesses primarily engaged in the business of lending, such as banks, finance companies, and factors (pawn shops, although engaged in lending, may qualify in some circumstances).
• Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds (except Eligible Passive Companies under § 120.111).
• Life insurance companies.
• Businesses located in a foreign country (businesses in the U.S. owned by aliens may qualify).
• Pyramid sale distribution plans.
• Businesses deriving more than one-third of gross annual revenue from legal gambling activities.
• Businesses engaged in any illegal activity.
• Private clubs and businesses which limit the number of memberships for reasons other than capacity.
• Government-owned entities (except for businesses owned or controlled by a Native American tribe).
• Businesses principally engaged in teaching, instructing, counseling or indoctrinating religion or religious beliefs, whether in a religious or secular setting.
• Loan packagers earning more than one third of their gross annual revenue from packaging SBA loans;
• Businesses with an associate who is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude.
• Businesses in which the Lender or CDC, or any of its associates owns an equity interest.
• Businesses which:
• Present live performances of a prurient sexual nature; or
• Derive directly or indirectly more than de minimis gross revenue through the sale of products or services, or the presentation of any depictions or displays, of a prurient sexual nature.
• Unless waived by SBA for good cause, businesses that have previously defaulted on a Federal loan or Federally assisted financing, resulting in the Federal government or any of its agencies or Departments sustaining a loss in any of its programs, and businesses owned or controlled by an applicant or any of its associates which previously owned, operated, or controlled a business which defaulted on a Federal loan (or guaranteed a loan which was defaulted) and caused the Federal government or any of its agencies or Departments to sustain a loss in any of its programs. For purposes of this section, a compromise agreement shall also be considered a loss;
• Businesses primarily engaged in political or lobbying activities.
• Speculative businesses (such as oil wildcatting).

SBA requirements you will need to make sure you meet:

• You must be officially registered as a for-profit business, and you must be operating legally.
• As the business owner, you cannot be on parole.
• Your business must have fewer than 500 employees, and less than $7.5 million revenue on average each year for the past three years
• Your net income must be under $5 million (after taxes and not counting carry-over losses), and your tangible net worth must be less than $15 million.
• You must show you are investing your own time and money into the business, having “invested equity.”
• Your business must be physically based in the United States, and you must be doing business with the U.S. and its territories.
• Your small business must be in an SBA-eligible. 
• You’ll need to show that you’ve already tried and failed get funds from other financial lenders, fully exhausting non-SBA loan options.
• You’ll need to prove you’ve got a sound business purpose for the loan you’re requesting, and that your intended funds usage is approved by the SBA.
• You’ll need to prove you’re not delinquent on any existing debts to the U.S. government (taxes, student loans).

 Additional Beneficial Business Qualities  

In addition to the eligibility requirements, there are a few additional qualities which can increase your likelihood of SBA 7(a) loan approval. 

A good credit score – preferably above 680.

A history free from recent bankruptcies, foreclosures, or tax liens.

Having been in business for at least two years.

The ability to provide collateral for loan requests over $25,000.

The ability to make a down payment of 10% if your intended use of funds is to purchase a business, commercial real estate, or business-related equipment.

Sufficient cash flow to meet your debt obligations.

Sufficient working capital (once you subtract liabilities from assets).

Often the term “hard money lender” conjures up a negative impression in many minds. It is an old expression used “on the streets” for extreme loan terms with negative consequences. But in the real estate world, hard money lenders are private lenders that play a very significant and positive role in the industry. They provide funds to investors that do not have the funds themselves or are un-bankable. What a great resource!  

There are several advantages of using a hard money lender to purchase your real estate properties. The ability of the lender to fund the loan quickly can be the difference between winning and losing a deal, especially if you are trying to secure a property against other competing bids. A quick close with a hard money loan can entice sellers and set your offer apart from other buyers with slower, more conventional funding.

Hard money lenders can typically fund these deals within a week. Compare that to 30-45 days it takes to get a loan from a bank or credit union. Not to mention, some private lenders can even process an application in 1-2 days, and sometimes it can be completed the very same day.

Private lenders can structure hard money loan repayment and collateral release terms in ways that are mutually beneficial to both lenders and borrower. Banks and credit unions are not as flexible and typically take a multipurpose (one-size-fits-all) approach to all loan requests. Hard money lenders will often structure loans based on a percentage off the purchase price or LTC (loan-to-cost) as well as the LTV (loan-to-value) with value being based on the quick-sale value of the collateral property. 

And if you’ve been turned down for a conventional loan due to past credit trouble, foreclosures, or a short sale, you know how frustrating it can be. Not to mention, there’s numerous reasons for denial banks can offer—even if your financial history is spotless (e.g., self-employment, new job and lack of income history, incomplete records). 

Hard money lenders can look past these issues as long as the loan can be repaid, and the borrower has enough equity invested in the property. Many banks will cap the amount of loans to a single borrower at four. Hard money lenders do not have these types of limitations. They are primarily concerned with the borrower’s equity in a property. Hard money lenders often view working with an investor with multiple properties as a positive because the borrower has more options and can cross-collateralize properties if needed.

A final benefit of working with a hard money lender is free advice from real estate experts. The hard money lender wants the project to go as smoothly as possible, just as the real estate investor does. A reliable and experienced hard money lender analyzing a loan request or project will give their honest opinion and bring up any issues that could jeopardize the project. The lender may bring up concerns the real estate investor was not aware of that could potentially hurt the project if not addressed. The advice from the hard money lender could also cause the real estate investor to reconsider moving forward with the subject property altogether to avoid taking a loss on the project.

Hard money lenders play an important and positive role in the real estate investing profession. If you are a new or relatively inexperienced investor, we highly recommend using a hard money/private lender for your first few deals. Why not have an expert as your partner?