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The loan application process might seem confusing and stressful, but fear not – Professional Carwashing & Detailing has tracked down a loan expert to give you the tips and tricks you need to get on the right financial path.
Jim Phelps, president of Capital Equipment Leasing, Inc., is here to share with you what it is you need to know, have and be prepared for when it comes to acquiring financial backing. Whether going through a local bank, or the Small Business Administration (SBA), it will take some homework, and some tenacity, but it’s definitely doable if you follow the right steps and avoid potential pitfalls.
There are funds out there
First, let’s start with some good news. Although some may be wary about the state of the current economy, according to an earlier story from Professional Carwashing & Detailing, the SBA increased the number of loans it approved in 2010 by about 30 percent over 2009. An Oct. 7 report from The Wall Street Journal, said the agency had approved nearly 55,000 small business loans, valued at about $16.84 billion, by the time its fiscal year ended in September 2010. In 2009, the agency backed just over $13 billion, and in 2007, before the recession hit, that amount was more than $20 billion.
The increase in 2010 was due, in part, to last year’s stimulus plan, which eliminated fees and increased the government's maximum guarantee to 90 percent.
First things first
According to Phelps, it is imperative to go into the loan application process with all the proper paperwork on hand and to be extremely organized. He said that if you walk into a bank with just an idea, and nothing else, you will be turned away.
“The first thing anyone needs to do is get their financial house in order,” Phelps said, “making sure they will present themselves in the best light.”
Therefore, have the following items in place before talking to a lender:
- A business plan;
- Personal financial statement;
- A credit report;
- Have your business name officially established/filed (business certificate/license or incorporation);
- Set up tax ID numbers;
- A summary of your management skills and experience;
- Two years of tax returns; and
- An already established bank account with as high a balance as possible.
Where to turn
Once all of the paperwork is in place, you can consider a number of different lending options:
- Your local bank;
- A private investor;
- By taking out a second home mortgage;
- Through a government program (state and local economic-development agencies); or
- Family and friends.
Phelps advises you to turn to your local bank first, which will probably steer you toward an SBA program (see below) because “new businesses traditionally get referred there first.” While the bank and the SBA are different entities, they work together to meet your financial needs. Sometimes the SBA lending criteria is less strict or sometimes a bank can lend to you directly; each case is different and there is no clear cut route.
If you have equity in your home you can consider a second mortgage. “But,” Phelps said, “I would not recommend a home equity line of credit unless you have no other choice. The distinction is that a home equity line of credit is considered a revolving debt and it drags down your credit score.” A second mortgage would instead show as on the real estate side and does not hurt a bureau score as much.
There are also government programs, and state and local economic-development agencies that will work with potential business owners and help them out financially. This varies from state to state and from city to city. For example, some municipalities will offer up special grants to minorities, or cities, looking to boost a run-down section of town, will entice investors with programs for building in a certain area.
Phelps said you can ask relatives or friends who have the money. If you do this, definitely consult an attorney, he noted. “If the relationship goes sour, you want to have an exit strategy in place from the beginning.”
After you have gotten your loan and are building your new business, you may find you need additional money to purchase equipment. According to Phelps, there are some equipment lease programs available that will consider funding new businesses.
What is the SBA?
According to its official website, the SBA, founded in 1953, “dedicates its energy and resources to providing support to small businesses and small-business owners across the nation.” There are 69 local offices throughout the United States, and one is in place in every state.
The SBA will help out small businesses financially, and with the planning process, and also offers advice, seminars and training for new business owners.
Also, on Sept. 27, 2010, President Barack Obama signed the Small Business Jobs Act of 2010 which allotted an additional $505 million to SBA which raised the total amount of money available to small businesses to $14 billion. The Bill also set up a $30 billion Small Business Lending Fund which provides capital to small banks “with incentives to increase small business lending — could support several multiples of that amount in new credit,” a whitehouse.gov statement said.
Upon signing the new bill into law, President Obama said, “Now this is important because small businesses produce most of the new jobs in this country. They are the anchors of our Main Streets. They are part of the promise of America — the idea that if you’ve got a dream and you’re willing to work hard, you can succeed.”
Now that we know there is money to be loaned and we know what paperwork is needed, the next step is to approach the bank, a private investor, or government agent about your financial needs and proposition.
According to Phelps, if you’re going to go to your bank, make an appointment, dress professionally, have a clean portfolio, bring all of your paperwork and be prepared to answer any questions with ease and confidence. Treat it like a job interview.
Keep in mind, though lenders seem to be saying yes, more and more, be prepared to be sent back to the drawing board, asked to come back with more paperwork, and for the possibility of being rejected altogether. One surefire way to be rejected is if you have bad credit or you are unsure of how you can repay a loan.
One thing is for sure, though, stated Phelps, and that is that the economy is getting better and things are looking up for loan application approvals.
Jim Phelps can be reached by e-mail at firstname.lastname@example.org or by calling 1-800-400-0365.