Online Microlenders Offer Capital

In 2008 Chris Byrne opened The Gear Geeks, an eBay store that sells musical equipment, with $2,800 in cash. To purchase inventory, the Huntington Beach, Calif., 'trep relied on a business line of Ignore warning credit from his bank. When the recession caused his credit line to dry up, Byrne turned to Atlanta-based Kabbage, one of several online microlenders that offer short-term capital to young businesses.

The $5,000 credit line Byrne received from Kabbage in August 2011 soon grew to $38,500--nearly three times the amount of his former bank line of $13,500. With the ability to purchase more inventory, he saw his revenue quadruple from $10,000 to $15,000 a month to $40,000 to $60,000.
Kabbage, which launched in November 2010, serves online merchants who sell via Amazon, eBay, Etsy, Shopify and Yahoo. The company uses a merchant cash-advance model. "But it's nothing like your mother's MCA model," says Kabbage co-founder and COO Kathryn Petralia.

Credit lines range from $500 to $50,000, with fees running 2 to 7 percent over 30 days and 10 to 18 percent over six months. Besides the usual banking information, Kabbage's online application draws data from a borrower's e-commerce store and online payment service. Borrowers who also provide access to their UPS, QuickBooks and social media accounts can level up their credit lines.
We spoke with Byrne about the lifeline Kabbage threw him.

Why did you decide to secure funds this way?
My bank was acquired by a larger bank. I had an existing business line of credit, and they just shut it down. My FICO [score] was between 674 and 700 at the time. It made a huge difference in being able to acquire inventory, obviously. We sat frustrated for about a year and a half like that. It really was tough.

What did the application process entail?
I saw the banner on eBay. I clicked it just out of curiosity and went through the process. It was probably 12 minutes before I got approved for $5,000. They actually deposit the funds instantly into PayPal. They really look at the whole picture. It's not just all about the FICO score. They are looking at your [sales] flow, your volume of PayPal, etc.

When did your credit line increase?
I'd learned to rotate stock fairly quickly. We were able to knock out all of the $5,000 and return it in about a week and a half. After repeating that same cycle a couple more times, they raised my limit to about $15,000. After that, it was probably four months, five months before I topped out [at $38,500].
I'm sure we've cleared well over $200,000--probably approaching $250,000 to $300,000--from the time that I signed up with them.

How has access to this capital changed your business?
We're starting to have the headroom to buy whatever we want. We're getting estate liquidations and we're able to buy them out. So now we're turning into an eBay trading assistant more than just a musical-instrument dealer. It's pretty neat.

What are the downsides?
There are cheaper ways to get money if you have really good credit. We just practice a real disciplined thing of taking a draw out, buying only inventory with it and trying to return that draw within 28 days. You really need to be disciplined when you are working with those percentage parameters.

Do you have a personal limit on how much you're willing to draw at once?
Typically I take no more than about 50, maybe 55 or 60, percent of my total credit limit at a time. That's really important. If I'm [close to that], then I know sales are slow.

What advice can you offer others interested in this kind of financing?
Be disciplined with your turnaround times per advance and buy inventory only. Use it for something that's going to generate income for you.

Read more: http://www.entrepreneur.com/article/225252#ixzz2gCWBMgx9

Read more »

Basic Guide to Bank-Term Loans

What it is: Term loans are the standard commercial loan, often used to pay for a major investment in the business or an acquisition. The loans often have fixed interest rates, with monthly or quarterly repayment schedules and a set maturity date.
Bankers tend to classify term loans into two categories: intermediate- and long-term loans.
Intermediate-term loans usually run less than three years, and are generally repaid in monthly installments (sometimes with balloon payments) from a business's cash flow.

Long-term loans can run for as long as 10 or 20 years and include additional requirements such as collateral and limits on the amount of additional financial commitments the business may take on.

Upside: Term loans are often the best option for established small businesses. If your financial statements are sound and you're willing to make a substantial down payment, you can receive financing with minimal monthly payments and total loan costs. The loans are best used for construction, major capital improvements, large capital investments, such as machinery, working capital and purchases of existing businesses.
Downside: Term loans require collateral and a relatively rigorous approval process but can help reduce risk by minimizing costs. Before deciding to finance equipment, borrowers should be sure they can they make full use of ownership-related benefits, such as depreciation, and should compare the cost with that leasing.

Also note that when it comes to loans more than $100,000, you need a complete set of financial statements and must undergo a complete financial analysis by the lending institution.

How to get it: Large U.S. banks are active in business lending. But it is also worth checking out local community banks with a focus on business lending because they have more leeway when it comes approving loans. Their officers can also be a wellspring of useful advice about how to secure financing.

The degree of financial strength required to receive loan approval can vary tremendously between banks, depending on the level of risk the bank is willing to take on. Search for a prospective bank on the FDIC's website and then click on "latest financial information."

Find "performance and condition ratios" and zero in on the "total risk-based capital ratio," which regulators require to be above 10 percent if a bank is to be considered well-capitalized. The higher ratio, the more secure the bank is financially.
Additional guidelines to consider when selecting a business bank:

• Ask friends where they bank and if they are satisfied.
  
• Forge a relationship with a bank long before you will need a loan, it will help you find out how they will treat you. Believe it or not, banks want to talk to you even if they cannot lend you money.
  
• Scan local business news stories for evidence of who is making the kinds of loans you are seeking. Not all banks can be the best at everything. Some are better at business loans, while some are better with consumer deals.
  
• Visit two to four banks to find your fit. Be upfront, and tell them you are considering a loan and that you are talking with other banks. Then listen to their pitch.
  
• Think about working through the SBA or other economic-development groups to secure better terms. They are not only for businesses that cannot get funding any other way.
  

Banks consider the following "five C's" when making decisions about term loans:

1. Character: How have you managed other loans (business and personal)? What is your business experience.
   
2. Credit capacity: The bank will conduct a full credit analysis, including a detailed review of financial statements and personal finances to assess your ability to repay.
   
3. Collateral: This is the primary source of repayment. Expect the bank to want this source to be larger than the amount you're borrowing.
   
4. Capital: The bank does not want to be left holding the bag. So what assets do you own that can be quickly turned into cash if necessary? The bank wants to know what you own outside of the business -- bonds, stocks or apartment buildings -- that might be an alternate repayment source.
   
5. Comfort/confidence with the business plan: How accurate are the revenue and expense projections? Expect the bank to make a detailed judgment.

Ref :  http://www.entrepreneur.com/article/52728#ixzz2fResw1p8

Read more »

How To Get Loan Application Approved

The following are question and answer about How to Get Your Loan Application Approved :

How Is The Lending Climate For Small Business Changing?
Credit is coming back to midsize and larger companies faster than small businesses. That's because small businesses are riskier. . .  Small businesses should benefit from general economic conditions improving and, as that happens, lenders should feel comfortable taking on more risk and making more small-business loans.

Can You Talk About Recent Legislation That Might Help Entrepreneurs To Find Loans?
The Small Business Jobs Act of 2010 expanded several Small Business Administration loan programs significantly in terms of the size of loans and the kinds of businesses that are eligible. For example, The SBA's 7(a) program had been capped at $2 million per loan, and now those loans can be made for up to $5 million. As entrepreneurs start to think about expansion and do their lease-versus-buy analysis, now is a good time to buy property. But $2 million often doesn't cut the mustard [to buy commercial space]. So $5 million gives some business owners the opportunity to borrow, not just for working capital or capital investments, but also for real estate.
Also the CDC/504 program used to be just for new business and real estate. Now you can refinance an existing loan, so they've expanded that program, too.
Separately, the Jobs Act also made $30 billion in funding available for qualifying banks to use to make small-business loans, and that money is starting to become available.

How Will The SBA-Backed Loan-Application Process Be Different Than It Was Three Years Ago?
You need to be prepared to have more skin in the game. You can't put 5% or 10% down and get a loan. Those days are gone. If you want someone to lend you money, you need to share the risk, and in a painful way. Depending on the lender, you should expect to put up 20% to 25%. With SBA-backed loans, the down-payment rates are lower, but even with these loans, some lenders were doing 100% financing a few years ago, and now that's no longer possible.

Any Advice For Winning The Loan You Want?
Stick to what you know. Entrepreneurs are innovative and love to do creative things, but now is not the time to go way outside of your box. Then it comes down to good financial planning. Make sure your financial records are well-organized. You need financial statements or three years of tax returns, and a business plan that explains what happened over the past two years. You need to know what you want to do and what it takes to do it, then figure out what it's going to cost. You have to have a good, realistic plan. Don't ask for less than you need. But don't over-leverage yourself.

What's The Biggest Mistake You See In Loan Applications?
For a startup or a business that wants an expansion, they can be overly optimistic about the timetable, how fast those cash flows are going to come. Lenders are focused on that. They want to make sure your business cash flows. They want to make sure your plan is realistic and will cover your debt service and leave money left over for the entrepreneur to live on

Read more »

Where to Get a Small Business Loan

Money still isn't falling off trees for small businesses, and the lending seas can be a challenge to navigate. Although you need funding, you want to make sure your deal is better than the one offered by the neighborhood loan shark.
If you want to expand your business, you're going to need some cash.

Money might be available thanks to stimulus spending, but that doesn't mean it's easy to get.

"The [banks] have tightened their lending policies, and it is more difficult for an entrepreneur to get financing,' says Velda Eugenias, a certified financial planner with Eugenias Advisory Group in Gadsden, Ala. "It is causing the small-business owner to have to get creative with finding sources of capital.'
Here are a few options:

• Traditional bank loans
  Your local bank can offer low interest rates and long repayment plans. Sounds good, but some entrepreneurs have found that stricter underwriting guidelines make it nearly impossible for these loans to be approved.
  
  "The negative to a bank is that the loan can often be very hard or next to impossible to obtain,' says Rick Kahler, a certified financial planner with Kahler Financial Group in Rapid City, S.D. "Also, most bank loans are 'recourse,' meaning if there is a default, the bank can go after your personal assets as well as any collateral secured by the loan.'
  
  Every bank's lending requirements are different, so shop around. Start with your personal bank. If a banker knows you, he or she may offer additional help when you apply.
   
• Government loans
  Like traditional bank loans, loans with a government guarantee can be tough to get, and the process can be painstakingly long. It's not uncommon for potential borrowers to bail before the loan is approved.
  
  If you can get a government loan, you'll find low interest rates and long repayment terms.  
• Loans from family and friends
  No one wants your business to succeed more than your loved ones or good friends, so your nearest and dearest may be a good funding source. In return for the loan and your gratitude, your new lender could receive a decent interest rate on the loan--better than a bank CD or money market fund.
  
  Make sure you do it right. Draw up a contract or promissory note for the loan with specific repayment terms so that you don't run afoul of the IRS. (If you're offered an interest-free loan, the IRS can actually attach a rate to it for you--or even decide that the loan was a gift, which will have tax consequences.)
  
  Anytime you mix business and personal, though, you risk hurting your relationship.
   
• Your home
  Home equity is one of the quickest and easiest ways to obtain cash, but that's what got so many homeowners in trouble during the past few years. Since then, banks have cut home equity lines of credit and have imposed stricter loan-to-value ratios.
  
  If you have home equity available, use caution before putting your home on the line.
  
  "If things go wrong with the business, you could end up losing your home, as well as being held personally responsible for the repayment of any shortfall,' Kahler says.
   
• Credit cards
  Personal and business credit cards can seem to be an easy solution to your borrowing needs, but they can be costly, with interest rates exceeding 20 percent--a huge spread over a bank loan. Also, business credit cards are not subject to the new CARD Act rules that apply to personal credit cards.
  
  Use credit cards sparingly and not for long-term financing.
  
  "If you have a short-term need for a purchase that you are 99.9 percent sure you will have the money to pay off the credit card when it comes in, then it is a good use of your resources,' Eugenias says.
• A partner
  If you're willing to share your future successes, consider a partner who can pour some money into your business.
  
  "Select a partner as you would a spouse, only more carefully,' says Kahler.
  
  While a partner could bring cash, she could also bring her own ideas about how to run your business. You'll have to be willing to share, and you'll need to draw up some specific legal agreements outlining the partner's role in the company.
   
• Less-traditional funding
  Websites are popping up that allow consumers to offer loans. For example, Prosper.com sets up potential borrowers and lenders who agree to three-year unsecured loans with fixed interest rates. Borrowers post how much they'd like to borrow and the maximum interest rate they'd pay, and potential lenders bid on loans.
  
• Your retirement accounts
  This should be the funding source of last resort. You've set money aside for your future and although you hope your business venture will add to your future, it's an enormous risk. If the business goes under, you can kiss your nest egg goodbye.
  
  Some 401(k) plans offer loans against your plan's value, and through payroll decusions you make payments on the principal and interest. But if you lose or leave your job, most plans require that the entire loan be repaid immediately.
  
  If you choose to withdraw funds from an IRA or 401(k) before age 59 1/2, you'll be subject to taxes and penalties, making this source of cash very expensive indeed.

Read more: http://www.entrepreneur.com/article/205646#ixzz2fG2thjAK

Read more »

Loan Market Remains Weak

Small-business credit quality weakened in the third quarter, as the health of the loan market remains weak, and a speedy recovery isn't likely. Findings from the Experian/Moody's Analytics Small Business Credit Index released today showed many small businesses continue to have trouble paying off their loans and that demand for new loans remains weak.

While 30- and 60-day past-due balances have improved, those loans that are considered severely delinquent -- more than 90 days past due -- are increasing. What's more, the delinquency rate for these balances is the highest it has been since the firms began monitoring the data several years ago.

The Index slipped 1.6 points in the third quarter to 104.1, down from a revised 105.7 in the second quarter. "Appreciable improvements in small business credit quality are unlikely until mid-to late 2013," according to the report.
It's encouraging that shorter term balances are improving, according to Mark Zandi, chief economist at Moody's Analytics. But the data also shows that troubled businesses are still stuck in a rut. A slowdown in consumer spending makes it more difficult for small businesses to get ahead in their loan payments.
"Their problems aren't getting solved," Zandi says.

The dollar value of severely delinquent loans has stayed about the same for more than a year, but the total credit outstanding continues to decline due to fewer loans being made.
Loan volume is down for a host of factors, including tighter lending standards and less willingness by small businesses to pile on additional debt. It's unclear from the data how much of the loan volume decrease has to do with lower demand versus tighter lending standards.
However, lower demand for loans seems to be more of a factor, according to Zandi. Businesses are still nervous about taking on debt and many have enough cash on hand, reducing the need for loans, he says.

Uncertainty over the fiscal cliff, the Treasury debt ceiling, deficit reduction and taxes will likely continue to weigh on credit quality over the next several quarters. There is hope, however, that credit conditions will improve if President Obama and Congress address the various fiscal problems in a reasonable and timely fashion.

Ref : http://www.entrepreneur.com/blog/225050#ixzz2f8d72VNi

Read more »

Why Business Loans Are Very Interesting

After years of being beaten up and blamed for every ailment besetting the economy, banks may be able to start defending themselves a bit. For several years now, many small-business owners reported having trouble securing loans for their enterprises. That certainly sounded consistent with what we know about the economic downturn -- small companies and their balance sheets were hit hard during the recession, and increased bank regulation made it increasingly challenging for some businesses to qualify for a loan.

But that situation has changed.
To put our finger on the pulse of small-business lending for the first half of 2013, we spoke to several experts. What they revealed is surprising: Lending opportunities are available, but small-business owners don't seem to want or need them. To find out more, read what lending experts had to say to Business on Main about the state of small-business lending:

William C. Dunkelberg, chief economist of the National Federation of Independent Business (NFIB):
"The banks have plenty of money to lend. In fact, the excess reserves at the Fed are at an astounding all-time high. With a capital reserves requirement of 10 percent, banks look to invest the other 90 percent. The problem is, no one is coming and asking for loans.

"In NFIB's December survey of nearly 600 people, an estimated 65 percent of those surveyed said they didn't want a loan, and 29 percent responded that their credit needs were met. The truth is interest in borrowing remains historically weak, and the outlook for business conditions for mid-2013 remained at the second-lowest reading in 38 years of the survey.

"What's more, small businesses aren't that optimistic, with 45 percent of those surveyed [thinking] that business conditions will be worse six months from now. With consumer spending down, companies aren't growing. So what would small companies want a loan for? Many of them aren't planning on expanding in the coming months ahead. Capital spending remained in ‘maintenance' mode -- historically low -- and plans to make capital outlays remained at recession levels."

Michael Alter, president and CEO of SurePayroll:
"Small businesses are remaining in neutral. We have a challenge in the economy: The demand for business services isn't growing fast enough for the majority of them to need extra capital. Even though we had some uncertainty cleared up with the fiscal cliff decision, there is a lot of long-term uncertainty. That means that small businesses are sitting on the sidelines rather than investing aggressively; there just isn't as much demand for lending.

"Our Small Business Scorecard survey reported 82 percent of small-business owners said they didn't need money in 2012. Of those that did, only 32 percent couldn't get the loan they wanted.
"During the recession in 2009-2010, small businesses needed money -- not to grow -- but to survive. Banks were hit aggressively and regulators required increases in capital. In 2011-2012, banks were better positioned financially and even though regulators said, ‘Don't make risky loans,' the banks' balance sheets could handle them.

"Once we get some clarity around taxation, it will drive more demand into businesses and drive more need for loans. So we don't have a doomsday scenario -- we are no worse off, but we are no better off either."

Jordan Peterson, senior vice president of Business Banking Credit Strategy at PNC Bank:
"PNC is actively lending to businesses of all sizes. Last year, we committed more than $4 billion in small-business loans. However, due to the slow pace of economic recovery and continued uncertainty in Washington, we expect small-business owners to remain cautious moving into 2013. Banks are eager to lend to qualified applicants, but demand continues to be down as businesses struggle to regain confidence that was lost during the recession.

"The recent recession took a big toll on small businesses and their appetite for financing. Small-business owners were the first to get hit by the slumping economy, and were often the hardest hit due to their size and ability to withstand losses. As the economy recovered, owners regained confidence and started to invest more in their businesses. If the recovery continues to build steam, loan demand and access to financing should continue to increase as a result.

"The takeaway? If your business is stable and seriously looking for lending as a way to grow, now is a good time to get in touch with your banker. But be sure to shop around -- banks often specialize in different industries. Also, community banks may be willing to take on a small-business loan, even though it's deemed riskier, because they have a longstanding relationship with you, the business owner."

Ref: http://www.entrepreneur.com/article/225996#ixzz2efXmWVcK

Read more »

Choosing a Bank to Get a Loan

Consolidation has cut the number of chartered U.S. banks roughly in half over the past 20 years, but a reduction in the number of banks has not translated into a reduction in the availability of loans for growing businesses.

The application process might be daunting, but the money is there. That's partially because the number of branches has not fallen off even though the names on the doors have changed. It has more to do with the industry's economics, which have forced surviving banks to compete harder for the right to lend to small- and midsize-business customers.

Jonathan Scott, a finance professor at Philadelphia's Temple University who studies small-business financing, says the trend is friendly to entrepreneurs and business owners. In recent decades, Fortune 500 customers have increasingly moved their business away from banks and have opted to finance through their own retained earnings or with the low-risk investment option of commercial paper. At the other end of the spectrum, home mortgages have migrated to the secondary market. Credit cards have also lost some of their fizz recently, as consumers have taken advantage of home equity loans and lines of credit to pay down plastic. What is left? Almost by default, Scott says, small and midsize businesses have become a focal point for the nation's biggest banks.

That's good, but it doesn't mean comparison shopping among banks is simple. It's relatively easy to peruse a bank's website to see what it offers in terms of the types of accounts available, the extensiveness of the branch network or the availability of customer support, for example. But comparing and contrasting the products, services and fees that matter most to you is hardly simple. For one thing, the big, national banks often tweak their products and rates by region, so the most relevant information might not be easy to tease out. For another thing, the banks don't all emphasize the same aspects of their businesses in their marketing efforts. In some cases, they take great pains to hide the details that matter most, such as fees for exceeding a certain number of monthly transactions. And the half-dozen or more types of checking accounts each bank offers make easy apples-to-apples comparisons nearly impossible. The bottom line: It could take some serious searching to figure out which big bank--or whether a big bank--is right for your company's situation.

Zen Makonnen, founder and CEO of TechFolio LLC, an IT consulting firm in Tysons Corner, Virginia, found that banks' ads and fliers didn't help her distinguish much between her choices. So she created a spreadsheet with categories for account types, fees (upfront and hidden), minimum balance requirements, payroll and merchant service options, retirement plan help, loan flexibility, online banking options and access to decision-makers. Then, she interviewed the banks in her area to see where they stacked up. She found that their products, services, rates and fees didn't vary much--after all, competitors watch each other closely. Ultimately, she went with Bank of America because of a budding relationship with a vice president who helped her line up financing, consider whether to bring investors onboard and deal with other key issues. "I lucked out by finding that person," Makonnen says.

Scott says that personal touch is what entrepreneurs and business owners often seek out. So, like Makonnen, check the products, services, interest rates and branch networks in your area. But be prepared to find minimal differences. The real search begins after this initial investigation. "Make an appointment; go see the lending officers," Scott suggests. "And rely on your social network for advice.

Ref : http://www.entrepreneur.com/article/165830#ixzz2eTMKzWen

Read more »