The Silvano Group

Borrowers seeking bad credit commercial loans have basically three options.     However none of these options are ideal. They are money loans, commercial hard money loans and SBA 7a Loans And due to the credit crisis these options are becoming more and more limited.  Never before has personal credit been so important for commercial loans. 

This may seem painfully obvious, but worth noting that everything should be done by the borrower to restore/improve their personal credit score.  Commercial loans with bad credit are very expensive and also very hard to get funded in this market.  We are currently in one of the worst credit crisis’s since the Great Depression and banks are getting very conservative.  Credit scores are very easy for banks to identify and “pick on” 

As far as the expense, the difference in payment on a $1,000,000 loan amount  with a rate at 7% (is $7,067) vs 9% (at $8,391) is significant.  That a  $1,324 per month increase, or:

• $15,891 per year increase in payments, or
• $79,497 increase in payments over a 5 year period

Thats real money, cash out of your pocket…  Thats not potential equity build up, or principle paydown, etc but real cash out of your hands.  And this does not include the other costs to do loans.  For example, SBA 7a loans normally have a 2.75% “guarantee fee” which are points the Small Business Administration charges.  On a $1,000,000 loan amount that would be $27,000 in fees you would have to pay.  Hard money is more expensive.  Expect to pay 4-6%, again thats $40,000 - $60,000 in fees just to close the loan.  

Business Loans & Grants

The U.S. Small Business Administration (SBA), the federal agency created specifically to assist and counsel small businesses, suggests the following sources of business capital in addition to :

1. Finance Companies
2. Mortgage Companies
3. Frieds, Relatives, Individuals
4. Government Agencies (such as SBA)
5. Banks
6. State Government Financing Sources
7. Savings and Loan Associations
8. Insurance Companies
9. Small Business Investment Companies
10. Venture Capital Firms
11. Pension Funds
12. Private Foundations

Types of Business Loans

Banks and other financial institutions can assist you by providing business loans through personal or commercial credit. Examples of personal credit include credit cards, and home equity loans. Commercial credit includes business loans; here are some of the options:

Short-term business loans are one of the most common types of business loans and are usually for less than one year. They can provide interim working capital for a business temporarily in need of cash, and are typically repaid in a lump sum when inventory or accounts receivable are converted into cash.

Intermediate-term business loans are often used for a business start-up, the purchase of new equipment, expansion, or an increase in working capital. The maturity dates range from one to three years.

Long-term business loans generally are made for major capital improvements, acquiring fixed assets, or business start-ups. The term of the loan runs for periods of three to five years and is usually based in part on the life of the asset financed. Repayment is usually made in monthly or quarterly installments.

A line of credit offers you the ability to borrow money repeatedly, up to your credit limit, without having to re-apply. A line of credit is particularly important to businesses that experience seasonal fluctuations.

The Business Loan Application Process

Among the best assets you can bring to the lender is a well thought-out and documented business proposal. You need to clearly state the purpose of the loan (will the money be used for temporary working capital, buying equipment, or expanding facilities); the amount of funds needed and for how long; and a repayment schedule. Your business proposal should include the following information:

business description that tells the nature of the business, describes the product and its market, identifies its customers and competition.

personal profile that outlines the background and experience of each of the principals in a resume.

proposal that states the type of loan requested and its purpose.

business plan that outlines your corporate strategy for the next three to five years; it will aid you and the lender in determining whether the business will generate the cash flow needed to repay the loan.

repayment plan that tells how you propose to repay the loan or outlines a repayment schedule. The lender will be expecting you to repay the borrowed funds from the profits produced by the business. As a contingency, you might need to develop a plan on how you would repay the loan if the profits alone turned out to be inadequate.

supporting documentation will include copies of pertinent papers that support the information contained in your loan proposal-for example, a lease, certificate of incorporation, partnership agreement, letters of reference, contracts, invoices or vendor quotes.

collateral that you will use to secure the payment of the loan. Collateral can include business and personal assets such as inventory, equipment, and accounts receivable or real estate, stocks, bonds, and automobiles. Financial statements, both personal and for the business. It should contain a balance sheet showing business assets and liabilities, and a profit-and-loss statement showing revenues and expenses. You should be prepared to provide copies of your personal tax returns. You may be asked for a list of credit references. Lenders will check your personal as well as your business credit rating.

Lenders will carefully examine your financial statements and business projections. As a borrower, you must be fully prepared to answer questions about them.

personal guarantees of the owners or other principals usually are required, even from an established business. The lender also may request another party’s guarantee such as a cosigner or a surety, or may request a government guarantee from the U.S. Small Business Administration or other government agency.

In the case of secured credit, the lender is allowed to obtain a spouse’s or other co-owner’s signature on certain documents when the applicant offers, as security for the loan, property that the two own jointly. In this case, the spouse or other co-owner may be asked to sign documents—such as a mortgage or other security agreement that would be necessary under applicable state law to make the property available to satisfy the debt.