Business owners looking for startup or expansion financing are finding banks more cautious about lending in 2008. Lenders are looking for those with sterling credit, a good track record and a well-thought-out detailed plan on how much money they need, how they’ll use the cash, when they’ll pay it off and what they’ll do if something doesn’t go according to plan.

» The Basics

A startup or early-stage company has little chance of getting a significant bank loan. SBA startup loans, for example, are typically limited to $10,000. Where will the money come from?
A few ideas:

• Savings

If you aren’t confident enough to put your savings on the line, no one else will likely invest in your venture either. That means cashing in your stocks, selling the boat and even taking a loan from your retirement account, if necessary.

• Credit cards

While financial advisers wince at the idea of using plastic to fund your business, the truth is that many small companies charge their way through the first year or two of operation. If you use this option, get several cards with low interest rates and read all the terms and conditions carefully. Watch due dates, make every payment on time and be prepared for an interest-rate hike, even if you have an excellent credit score.

• Store credit

Retailers may make it easy to furnish your office with no money down, no interest or payments for a year. Make that store’s gimmick work for you, but prepare for the day when the bill comes due.

» The Next Steps

After you’ve tapped the “easy” money, try these sources of capital.

• Home equity

It used to be easy to use a home equity loan or line of credit to get tens of thousands of dollars. With declining home prices, those days are gone for most Floridians. For longtime homeowners who have excellent credit, it is still an option.

• Investors

There are no listings and few databases for private investors.
To find them, look for groups that work with investors, or “angels.” Talk with friends and business associates, industry insiders in your specific field and “true believers” in what you are doing.

» SBA Lending

Business owners often think that U.S. Small Business Administration loans are funded by the government. They’re not. SBA loans are made by commercial lenders, who only receive a federal-government guarantee for part of the loan. That means that many typical requirements for a bank loan, including the ability to repay the loan from the business’s cash flow, still apply. Good character, proven management ability, collateral and significant owner’s equity in the business are also important considerations in a bank’s decision making. In addition, all owners of 20% or more are required to personally guarantee SBA loans. For more information, click on sba.gov.

• 7(A) Business Loans (up to $2 million)

This is the SBA’s primary loan program. The maximum loan amount is $2 million, with a maximum loan guarantee of $1.5 million. The maximum guarantee is 85% for loans of $150,000 or less; 75% for loans over $150,000. (A $2 million loan would have a loan guarantee of $1.5 million, or 75%.)

Fees are 2% of the guaranteed portion for loan amounts of $150,000 or less, 3% for loans from $150,000 to $700,000, and 3.5% for loans over $700,000. For loans over $1 million, an additional 0.25% guaranty fee will be charged for the portion greater than $1 million. An ongoing servicing fee of 0.494% applies to the guaranteed portion of the loan for loans approved on or after Oct. 1, 2006. Interest rates are negotiated with the lender, but are subject to SBA maximums, which are pegged to the Prime Rate.

Loan proceeds can be used for fixed assets, working capital, inventory, seasonal line of credit or, in certain situations, for refinancing debt. Real estate may be financed for up to 25 years and working capital loans for seven years (with terms of 10 years in a select few cases). The maximum repayment for fixed assets other than real estate is the economic life of the asset, but in no cases longer than 25 years.

• SBAExpress (up to $350,000)

Lenders use their own forms and processes to approve loans in amounts up to $350,000, providing minimal paperwork to the SBA to obtain a maximum guarantee of 50%. Loan term varies.

Interest rates are tied to the Prime Rate, but are negotiated with the lender. For loans of $50,000 or less, lenders may charge up to 6.5% over Prime; for loans more than $50,000, the maximum rate is 4.5% above Prime.

• Community Express (up to $250,000)

This pilot program is available in geographic areas serving primarily low- to moderate-income entrepreneurs. Revolving lines of credit up to seven years are allowed. The maximum guarantee is 85% for loans of $150,000 or less; 75% for loans over $150,000. Collateral is not necessarily required for loans up to $25,000. The program also includes technical and management assistance.

• Patriot Express (up to $500,000)

This pilot program is available for businesses that are 51% owned by veterans, active duty military within 12 months of discharge or within 24 months of retirement, reservists and National Guard, spouses of any of the above and widowed spouses of service members and veterans who died of a service-connected disability. Revolving lines of credit up to seven years (with maturity extensions permitted) are allowed. The maximum guarantee is 85% for loans of $150 or less and 75% for loans over $150,000. Lenders are not required to take collateral for loans up to $25,000, may use their existing collateral policy for loans over $25,000 up to $350,000, but must take collateral for loans greater than $350,000.

» CDC/504 Loan Program

This program uses long-term financing to finance fixed assets for for-profit businesses with less than $7.5 million in net worth and less than $2.5 million in after-tax profits. The money can be used for assets such as land, buildings, machinery and equipment. Funds cannot be used for working capital, inventory, debt repayment or refinancing.

Typically a bank will loan 50% of the project’s cost, a Certified Development Company (see list of Florida offices at right) provides SBA-guaranteed funds for 40% of the total cost up to $4 million for small manufacturers (SBA limit is $2 million for non-manufacturers that meet public policy goals and $1.5 million for non-manufacturers that meet job creation or community development goals) and the remaining 10% comes from the owner’s down payment.

Repayment is over 20 years for real estate, 10 years for equipment. Interest rates are pegged to an increment above the current market rate for five-year and 10-year U.S. Treasury issues. Fees total about 3% of the loan.