Years ago, banks were the primary source of small business credit. They aren't anymore. Banks have been pushed out of their primary role in this marketplace by credit unions, online lenders, payday lenders and cryptocurrency.
Loans involve a borrower and lender, where the lender provides a sum of money to borrower for a negotiated period of time, and the borrower must pay interest, in addition to the principal value, back to the lender. Due to terms of the contract, the lender is guaranteed to make a profit if the borrower pays them back. The goal of the borrower is to use that principal money to generate a greater amount than that they must pay back. While there are various types of loans, taking out loans is the simplest and most common method of securing funds for small businesses. The loan must be approved by the lender, which is often a financial institution. Using a bank as an example, the bank will use the borrower's credit rating to determine their likelihood of paying back the loan. If the borrower is not rejected, the borrower will decide on a value and length of the loan, and the lender will offer the borrower an interest rate. It is important to remember that the lender, or bank in this example, tends to have more power in these negotiations.
Of course, after COVID, "there’s been a resurgence in bank lending to small businesses. Before COVID, large banks approved a quarter of small business loan applications, and regional and community banks approved nearly one half of small business loan applications." They were, and still are, a go-to capital source. While banks and other financial institutions are regulated (for details on different financial institutions, visit the "Source" tabs above), they have significant leverage in the loan negotiation process. Thus, not all bias is controlled, and racial minorities and women may face unfair rates or be rejected from the start.
To understand and navigate these issues we have provided information on bank practices, rules and regulations.
Request Help Now"A bank loan can help an individual or a business in buying something as simple as a car or a home for which she doesn’t have full purchase amount, or it can help businesses to buy machinery or set up big units for which it doesn’t have money."
Banks loans help a company fund its day to day operational capital and cash cycle. These are called working capital bank loans and cash credit loans.
Bank loans are hard to get. According to the NSBA report, only 15% of small businesses received a loan through a large bank. Interest rates for business loans from large banks, in general, have interest rates around 6% to 15%. Terms also vary, but bank loans tend to provide long-term financing with manageable monthly payments.
Eligibility criteria for loans largely depends on the financial institution from which the borrower seeks to lend. To see requirements for bank loans, for instance, please visit our banks sub-tab under Source. Overall, our general loan eligibility indicator under the Calculators tab should help determine your eligibility. Across the board, applicants must be at least 18 years old. After that, one�s credit score will typically be utilized by the potential lender.With bank loans, your eligibility depends on a number of factors: are you taking out a personal loan? Do you have any assets that can be used to secure the loan? How long have you been in business? Are you a woman or minority? Where are you (and the business) located? A personal loan has eligibility criteria that differ from those for a business loan. Length of the loan term is also a factor. If you just want an overnight loan, as opposed to a thirty year loan, the risk that the bank will not be repaid falls and so does the eligibility criteria. Other eligibility factors for person loans relate to employment, loan security, assets, debts and expenses, and your credit history.
Personal loans link to your credit as an individual and have rules that differ slightly from business loan requirements. You generally need a credit score that exceeds 550. (Order a free credit report once a year on AnnualCreditReport.com. See our section on credit scores on the credit cards page). Even if you have bad credit, you can apply for a business loan using your personal credit information. Just be aware that the chances of approval go down, of course. You may have the option of a secured personal loan, but it’s less likely that you’ll need to provide collateral with a personal loan than with a business loan.
Most lenders require that you have a steady income, to help guarantee that you can make the minimum monthly payments as set by the loan contract.
You need to be employed on a full-time basis for most personal small business loans. You should note that If you’re employed part-time or are self-employed, there are still loan options. And also note that even if you’re unemployed, there are lenders who accept government benefits as a form of income, but these are few. Interest rates will be higher as well.
A secured loans uses an asset (car, house) as guarantee of repayment. With an unsecured loan, your credit score is the main factor used to determine if you get the loan. (Again, see the credit card section and our discussion of credit scores).
The following documents are required along with your Business or Personal Loan application:
While banks have been lowering fees post-COVID, note that many credit unions have low or no fees on their business loans.
Other Fees include Late Payment Fees, Closing Fees, taxes.
Apply For A LoanMinority Small Business Loan Options.
In a word, maybe. Post George Floyd and as a result of the Black Lives Matter movement, there was a brief increase in minority lending activity. This has started to decline. Still, your success will depend on what type of minority you are and the relationships you have built with financial institutions of all types. Some of the government programs for women and minorities include the following: SBA 7(a) Loans & 8(a) Business Development Program, SBA Community Advantage Loans, SBA Microloan Program, Accion U.S. Network, Union Bank, The National African American Small Business Loan Fund, and the Business Center for New Americans. I can tell you without fear on contradiction that these programs are a stop gap and unlikely to be helpful unless you meet a set of super restrictive criteria. (It helps if you are a veteran, btw.) APPLY TO THEM ANYWAY. Just know that, like commercial bank lending, on which many of them depend, your results will be spotty at best.
The first thing to do is to develop an relationship with a financial institution in your community. Look for alternatives, like credit cards. Focus on credit unions. Consider microlending, new forms of financing like crowdfunding, Initial Coin Offerings (ICOs), Security Token Offerings (STOs). Just know that whatever road you take, it is likely to be a long one. DON'T GIVE UP.
Grant programs are an option, but one that forces an even steeper uphill climb. Why? Given the lack of standard lending, grant makers are overwhelmed with minority individuals seeking funding for good projects. The same rules apply: develop a relationship with grant funders. Get a good grant writer. Do your homework. Programs include: Community Programs to Improve Minority Health Grant Program, Community Connect Grants, Rural Business Opportunity Grants, Partnerships for Opportunity, Workforce, and Economic Revitalization Initiative, Water & Waste Disposal Loan & Grant Program, MillerCoors Urban Entrepreneurs Series (a contest, not a grant program), the First Nations Development Institute Grant.
According to one website, a researcher followed nine people—three black, three Hispanic, and three white—who applied for $60,000 small business loans. All nine presented the same type of business, the same background, and the same reasons for wanting the loan. The minority loan applicants received less information about loans and less assistance from loan officers." You can imagine the outcome.
At the federal level, there are six financial industry regulators:
At the state level, each state has an agency or agencies that are charged with supervising and regulating state-chartered banks and thrifts. For example, in California, financial institutions are regulated by the Department of Financial Institutions. A listing of state bank supervisors for all states is available at the website for the Conference of State Bank Supervisors (https://www.csbs.org/state-bank-directory)
The links below are to listings of women and minority-owned banks.
Feel free to look up these institutions and apply for financing. Please note the size of the institutions. Most (with the exception of some of the Hispanic banks) are small, and therefore, limited in terms of resources.
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