As a business coach, I get a lot of inquiries about small business funding and from what I can see there are a lot of misconceptions about how easy or difficult it is to obtain money, so I decided to speak with a local business banker, Mohammed Alkhatib, AVP, of Chase Bank in Brooklyn, NY, to get the skinny on the small business lending process, particularly as it applies to start-ups. Here are some notes from our conversation:
A typical business loan ranges between $200,000-250,000 with an average term of between 3-5 years.
Whether you’re starting a brand new business from scratch or you’re acquiring an existing business that will be under new management, your banker’s priority is to lessen risk as much as possible before they submit your application to underwriting. They assess every single flaw that could occur in the deal and review everything not one, not two but three times.
Banks generally require higher credit scores for owners of start-up businesses than they do for existing business (anything over 727-730), and they may require an SBA guarantee, a co-guarantor or two with strong tax returns, assets and cash collateral or investment accounts at other banks that they can place a lien against.
In addition, they may sometimes require a cash injection from the owners as well. This usually happens if there is a flaw in the credit score, there is a shortfall in the collateral, or if you don’t have a strong outside source of income to cover other existing debts or obligations. And naturally, this is in addition to a strong business plan with multiple years of projections.
When an existing business applies for a loan, banks look at the core of the business to determine if it is making sales and profits, often analyzing 3 years of tax returns to see if the business is consistently profitable. Because business owners tend to write off the maximum allowable expenses, banks will also look at the EBIDA, which is the earnings before interest, depreciation and amortization. Serious applicants will also submit a comprehensive business plan with several years of projections.
What type of small business lending does your business require? Join the conversation below:
