While 2014 was a solid year for small-business bank lending and 2015 is predicted to post even larger totals, what about those early-stage startup companies seeking microloans or that aren’t able to qualify for a bank loan? All hope is not lost.
Several options were presented to small, high-tech business owners Tuesday at a San Diego Regional Innovation Cluster workshop on alternative capital, ranging from microloans from nonprofit lenders and Certified Development Company (CDC) loans, as well as traditional bank financing.
“Believe it or not, banks are lending right now,” said Tony Guminski, vice president, small-business banker at Bank of America. “We actually lent over $100 million into the small-business sector here at Bank of America in San Diego in 2014, and in 2015 we actually plan on lending more.”
Bank of America (NYSE: BAC) offers a range of small-business financing tools, including secured and unsecured term loans, leases, credit cards, lines of credit, commercial real estate loans and Small Business Administration loans.
Two of the SBA offerings include the SBA 504 loans for commercial real estate purchases or renovation, which can range from $350,000 to $13.7 million with seven- to 10-year terms, and the SBA 7(a) loan used for working capital or to purchase or expand a business, which ranges from $350,000 to $3.5 million with a five- to 10-year term.
To qualify for a Bank of America loan, startups must have been in business for two years, with at least $250,000 of revenue, on top of the standard measures lenders look at, such as including collateral, capacity for repayment and capital. For a commercial real estate loan the applicant must occupy 51 percent of the building.
“That’s why we have such a strong relationship with Accion and CDC,” Guminksi said. “Because they help our clients that don’t qualify with Bank of America.”
Entrepreneurs who don’t qualify with a bank could consider a CDC small-business loan. Susan Lamping, vice president of community lending, advised first trying to get financing from a bank because its interest rates will be lower, but highlighted two CDC programs to bridge the gap for those unable to do so: the Community Advantage Loan and the SBA Microloan.
The Community Advantage Loan offers up to $250,000 in financing for business acquisitions or expansions in California, Arizona and Nevada. Rates range from prime — which is currently 3.25 percent — plus 2.75 percent up to 6 percent, meaning an interest rate between 6 and 9.5 percent, compared to a bank’s 5.5 to 6.5 percent — slightly, but not materially higher. Terms on this loan are seven to 10 years.
The SBA Microloan caps out at $50,000 with a rate of prime plus 4 percent, which means 7.25 percent today, with three- to five-year terms.
Lamping said the CDC looks for the five C’s of credit in an entrepreneur: character, a personal credit score of at least 650, with no bankruptcies within the past three years and no short sales or foreclosures in the past two years; cash flow, or the capacity to pay back the loan based on income or liquidity, with enough proven income for 18 months; collateral in the form of real estate, a vehicle or cash, though having no collateral doesn’t necessarily preclude you from a loan; enough capital to fund 30 percent of the project; and the conditions of the economy and the chosen industry.
For entrepreneurs who don’t meet these CDC checkpoints, Accion is the next best bet.
“Accion is a nonprofit organization, what’s called a microlender,” said Vallery Belloso, business development officer at Accion. “We specialize in very small loans, as low as $300 up to $75,000, and we exist to help the entrepreneur — either an existing business owner or startup owner who needs capital in this range and may not be able to get it through a bank at this point.”
Loans from Accion are strictly term loans from one to seven years, with the amount of financing and interest rate dependent on a six-tiered system based on credit score.
The rates range from 10 to 18 percent, with an administrative fee of $75 on average for loans less than $5,000 and up to 6 percent of the loan amount for financing more than $5,000.
“Having a more flexible program comes with a higher rate. However, the important thing is there are no prepayment penalties with our loan, so the whole goal is to have you transition out of Accion financing into a loan with a bank or the CDC to get that traditional loan down the line,” Belloso said.