A Common Sense Approach to Starting or Expanding a Business
You’ve decided to start a business. You researched the market, developed a business plan, identified interested clients, found suppliers to support you, and worked with a variety of resources to check and double check your plan. You are ready – except for one thing: you need money.
Or maybe, you started the business years ago. You’ve worked long and hard developing the business, and demand has steadily grown. Now you find yourself at a crossroads of opportunity. Continue on your current track, or invest in a new opportunity and change the trajectory of your business. But you need financing to take advantage of the opportunity.
These situations are not unique to your business. Is there a common sense approach to knowing if a bank is the right fit for your needs? If so, what options for financing exist to help a business start or expand?
Banks are generally the right fit for financing your business if:
- The business has been in operation 2 years or more
- The business is profitable and can support the payments on the needed debt
- The business has no more than $4 in debt for every $1 in equity
- The owners have experience in the industry and a good credit history
- The business has collateral to support the loan
In banking, we call these the “Five C’s of Credit.” Using the same order, these are: Conditions, Cash Flow, Capital, Creditworthiness, Character and Collateral. But if your business has a weakness in one or two of the Five C’s, a bank may still be able to assist by using an enhancement, like an SBA Guaranteed Loan to support your business.
The SBA programs allow the bank to offset the risk of one of the Five C’s while still ensuring we don’t do something too risky. For example, if your business is purchasing new equipment to take advantage of that new opportunity to expand, but a bank’s conventional loan terms which offer a maximum term of 5 years make the payments too tight, a 10 year term SBA loan may make the payments affordable.
Or if you have great experience managing a business for someone else, and you have an opportunity to purchase it, but there just isn’t much collateral, we can use an SBA loan to help you purchase the business and lend much more than the collateral value.
Or if your dream is to start a business and you have a long track record of successfully managing a business in that industry, you have a strong down payment and collateral that supports the request (maybe equity in your home), and you even have an outside income to reduce the risk further, but you can’t point to historic profits and cash flow, an SBA loan may be a way to assist you in financing your dream.
But there are other ways, too. Often startup and growth businesses get their funding through other sources. These may include:
- Home equity loans or lines of credit (obtained when the owner was working)
- Personal Credit Cards
- Family support
- Friends and other interested parties (like your clients or vendors)
- Community Development Financial Institutions (also known as Micro Lenders)
- Angel Capital & Venture Capital
As bankers, our job is to get to know you, understand your goals, and try to find solutions to help you achieve them. Sometimes that means making a loan; and sometimes that means introducing you to resources that can assist you.
At Hillcrest Bank, we strive every day to find common sense solutions to assist your business. Whether that solution is a conventional bank loan, an SBA loan, a home equity loan or an introduction to a community partner, we want to get to know you and your business. Once we understand you and your business, we will bring all of our resources to assist you.
Relationships start with getting to know one another. We call that banking “Where Common Sense Lives.”
-Mark A., SBA Division Director