From the course: Foundations of Raising Capital

Bank and SBA loans

From the course: Foundations of Raising Capital

Bank and SBA loans

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- Loans have been around as long as money itself. Thousands of years ago, farmers would use their crops or livestock in order to secure a capital loan. Loans were created as a way to make money. When you take on a loan, you pay back the amount you borrowed, which is called the principle, plus a monthly fee called interest. Banks all over the world have practiced lending throughout history and bank loans, also known as commercial loans, have played a huge part in helping businesses get their start. Today, commercial loans are issued by banks to individuals to finance their business needs. Usually those needs are capital expenditures like equipment or operating costs like payroll. Your eligibility for a loan depends on the bank's confidence that you can pay that loan back. That means looking at your credit score, the cash flows of your business, as well as collateral to secure that loan. Collateral is an asset like a home that can be seized by the bank if you go into default or are unable to pay back the loan. This is the bank's way of protecting their investment in you. If you can't pay them back in cash, they will take ownership of and sell your collateral to get as much money back as they can. Obviously it's tough to show cash flows for a company if there are no cash flows yet, as is the case with many startup companies. And if you don't have a strong credit score or assets to use as collateral, that makes getting a loan even tougher. But before you give up, some entrepreneurs who don't qualify for a traditional commercial loan from a bank, are eligible for an SBA loan. An SBA loan is technically a commercial loan with protection to the lender provided by the Small Business Administration. SBA loans are typically granted to business owners who have a specific need for helping the business grow. A good example would be the desire for a second location, an extra delivery truck, or an employee to keep up with customer demand. You can apply for an SBA loan with the Small Business Administration or a local Certified Development Company. There are hundreds of CDCs nationwide. SBA loans are a little easier to qualify for than a commercial loan because the SBA and CDC work together to guarantee some portion of the loan to the bank. This makes the loan less risky for the financial institution and therefore more likely for them to grant. Make no mistake, any loan, whether commercial or through the SBA is a debt that you are responsible for as the entrepreneur. You'll want to be confident in your ability to pay the loan back, or you'll put your credit and collateral at risk. But if you do qualify, and are able to finance your business through a loan, it's a great option. Unlike venture capital or private equity, commercial lenders don't take any ownership in your business. Once you pay back the loan, you're off the hook.

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