How to Apply for a Business or Commercial Loan

Preparing a business loan application request can seem challenging. The key is knowing what resources are available and how to access them. This blog explains the steps to consider when applying for a business loan, plus the resources and assistance available to women owned businesses to further their success.

Determine what type of financing support you need to help your business.

There are several types of business financing that can help startups get off the ground. Common types of startup business loans include:

• Commercial Term Loans. Commercial Term loans are generally issued by online and traditional lenders and involve a bank extending a lump sum of cash, repaid over a set period of time, at a set interest rate. These types of loans are usually for purchasing equipment, vehicles and machinery and get repaid typically over a 3–7 year period. Repayment comes from the cash flow of the business (profits).
• Commercial Line of Credit (Working Capital Line). The line is used to support the purchase of inventory, pay vendors, and cover overhead costs. Interest is only charged on the portion of the credit line accessed from month to month and are often approved for a 1-year period and renewed annually.
• Certified Development Company. CDCs are nonprofit entities that are certified by the SBA to fund a portion of SBA-backed loans. Small business applicants work directly with a participating SBA lender. The loan programs offered are designed to assist for-profit businesses that are not able to get other financing from other resources.
  • •  SBA 7(a) Loans. The 7(a) loan program is offered through the U.S. Small Business Administration (SBA) and extends business loans up to $5 million to eligible applicants. Funds can be used to cover equipment purchases and business expansion expenses, and interest rates range from Prime plus 2.25% to 4.75%.
    •  SBA Microloans. SBA Microloans are available to eligible business owners up to $50,000. Loans are typically offered to startups in disadvantaged areas and to those owned by minorities and women. Repayment terms may be as long as six years with interest rates ranging from 8% to 13%, depending on the lender.

 Maintaining Strong Personal and Business Credit Scores:

• Lenders evaluate an applicant’s credit score to gauge the amount of risk they pose and relying heavily on present and past repayment histories. Required credit scores for traditional banks and credit unions often start in the 680+ range. While SBA does not have a stated requirement most lenders working with the SBA require a minimum of 620 or higher. There are loans available for individuals with lower credit scores but are at notably higher interest rates.
• Prepare for the application process and gauge your approval odds by requesting copies of your business credit reports (if available before applying for a loan).
• Past credit history and payment of taxes are key elements when a lender is reviewing the loan package. If there are historic delinquencies in payments, liens, or judgments it will be viewed negatively both on a personal and business level.

Collateral Requirements for Bank Financing:

• Lenders will be requiring an equity contribution most often in cash as well as collateral (assets of the business, mortgage on personal residence for example). Traditional banking loans require a minimum cash contribution of 25%.
• Loans from investors and family members are often considered as part of the equity contribution with the understanding that the Lender’s get paid back first.

Basic Items needed for a Loan Request:

The commercial loan application process will depend on the lender you choose, but you will typically need to compile and submit the following paperwork:

• Personal and business bank statements
• Personal and business tax returns
• Financial documents, such as balance sheets, income statements and projections
• Description of collateral
• Existing debt schedule (if applicable)
• Develop a business plan outlining an executive summary, business description, management expertise, market analysis and funding request
  • • Often there are local resources that provide assistance in the development of a business plan (for ex. Score; division of the SBA)

Do Research on the Lenders:

Do some homework and research online what the lenders are requiring for terms and conditions as it can vary widely and their reputation within the industry.

• Annual percentage rates. In general, business loan APRs start around 8-13%, but rates may be higher for startup business loans. Visit each lender’s website or contact a customer support representative to determine available APRs.
• Fees and other costs. Loan origination fees can be wide ranging lender to lender. For example, the SBA requires a fee of 3% on its loans up to $700,000 and the fees increase with higher loan amounts. Other fees to consider are closing costs, prepayment penalties and late charges.
• Lender reputation. Even if a lender is offering attractive rates and terms invest the time to evaluate its reputation. It is important that you align your business with the right lender as they will be part of your support system.

Leveraging Partnerships:

Being able to tap into resources for other opportunities such as networking, counseling, and working on grant applications is extremely helpful in allowing you to further enhance your business.

Local NJ organizations such as Women’s Center for Entrepreneurship Corp., offers business counseling, educational resources and networking events for women owned businesses. (Chatham, NJ)

Another resource is the New Jersey Economic Development Agency (NJEDA). Creditworthy small, minority-owned, or women-owned business in New Jersey in operation for at least one full year who may not have the ability to get bank financing, or not-for-profit corporation in operation for at least three full years, may be eligible for assistance under the Small Business Fund. They review loans up to $500,000 for working capital or equipment purchases.

Helpful Links:

New Jersey Economic Development Agency: https://www.njeda.gov/smallbusinessfund/ Offers loans for small, women and minority owned businesses up to $500,000 that can’t receive traditional bank financing.

Small Business Administration: www.sba.gov; Covers various loan programs and requirements.

Women’s Center for Entrepreneurship Corp. (WCEC) www.wcecnj.org/wbc. They offer counseling and educational services for women establishing or growing their business.

Pursuit Lending - Small Business Loans in CT, NY, NJ, & PA - Pursuit (pursuitlending.com) SBA conduit lender.

New Jersey Small Business Development Corp. - https://njsbdc.com/  They provide management consulting and training programs to entrepreneurs, start-ups, and existing small businesses.

SCORE program – www.score.org; strong resource for the development of business plans.