If you have a small business in California, you may be in a position where you are considering small business loans. No matter in what state you are operating, a business loan can help your company expand to the next level. Small businesses have challenges that are unique to them. Almost half of businesses get additional funding from traditional large sized banks, while others use nontraditional lenders. This guide explains all everything you need to know about small business loans in California, including how to start small business loan shopping.
What Is A Small Business Loan?
In many ways small business loans are like personal loans. If you are considering a small business loan, it is important that you have a full understanding of small business loans. To be able to make the most informed decisions, you need to understand all aspects of small business loans. To do that, I like to break terms down into the simplest definition possible.
A small business loan is when you as a business owner requests to borrow money from a lender. Lenders for small business loans vary from a traditional bank, credit union, online lender, or a friend or family member. If your business has multiple owners, you all are requesting to borrow money for your business. You are agreeing to repay the loan by making regular payments of a set amount. The lender charges interest as a fee for allowing you to borrow money. These terms vary from lender to lender and based on your qualifications.
The loan agreement outlines all of the terms of your loan and you are agreeing to it when you sign the contract. The lender sets the interest rate as well as the length of the loan repayment period. The lender also sets how often you repay the loan, which could be bi-weekly or monthly. These terms drive how much you pay with each payment. As long as you have a fixed interest rate, the amount you repay remains the same and does not fluctuate.
Small Business Loans in California
There is a slight benefit to obtaining small business loans in the state of California. They tend to be easier to obtain and the terms are more clear. When operating a business in California, you can rest assured that your lender is giving you all the information you need. There is a new law in California, SB 1235, that requires all lending to small businesses be complete transparent. The state of California likes to encourage the growth of small businesses. Over 90 percent of the businesses in California are considered small businesses. Most of those businesses borrow money in amounts less than $100,000.
There are about 10 companies that specialize in providing loans options in California. Each of these loan options have parameters which your business needs to fit to be eligible for the loan. Those parameters may vary between number of employees or location within the state of California.
What Is Considered A Small Business?
Before you can determine if you want to consider small business loans, you need to understand if your business is truly a small business. The government closely regulates the definition of small businesses and the document is around 50 pages long. The easiest way to determine if you have a small business is look at the number of employees in your business. The type of business and number of employees defines you business as a small business or not.
I want to focus on the organization of small businesses. A common category of small businesses is a sole proprietorship. It has a simple structure which is easy to create. An easy definition of a sole proprietorship is when you are doing work in which you receive a payment, but you are not an employee of another person, or business. Consultants, freelance writers and entertainers are a great example of this type of business. You are responsible for making all the business decisions. That also means that all the profits and losses are yours, too. There is not much paperwork for you to fill out, except an additional form or two when you file your income taxes.
A partnership is a business with two or more owners. This is similar to a sole proprietorship, except more people have the ability to make decisions. That certainly can complicate the daily operation of your business. With a partnership, you can distribute the liability in varying ways. You can have a limited partnership where one of the partners has more liability for the negative aspects of the business. Those partners with limited liability also have limited control. You can create a limited liability partnership where all partners have limited liability. This protects all partners from taking on the debts of the company. When there are multiple people making decisions, it is smart to protect yourself.
What Is The Difference Between A Short Term And Long Term Loan?
There is an obvious difference between short term and long term small business loans. That is the amount of time you have to repay the loan. Short term loans must be repaid anywhere between several months to several years. It is sort of like buying a car. You are financing a decent amount of money for a short period of time, usually three to five years. If you can afford to make the payments, it may be worth it to you to get a short term loan. You pay the money back fairly quickly. You also build up positive credit.
Short term loans are typically small amounts. However, keep in mind, that is a relative term. If your business earns $500,000 a year, then 100,000 may seem like a small amount to you. If your business only makes $20,000 then $3,000 may seem like a small amount to you. It is all about the perspective of your business. Lenders may want you to repay short term loans weekly, or biweekly instead of monthly. You can negotiate those terms with your lender.
Long term loans typically mean you are borrowing much larger amounts of money for a longer period of time. It really depends on the nature of your business. You may need money to build a new building or purchase expensive equipment. You may need longer than five years to pay the money back to the lender. This type of loan more closely resembles a mortgage. These loans cover a broad range of needs for your business. If you are interested in a long term loan, you should shop business loans now to make sure you are getting the best deal. You are invested in paying back this loan back for a long time, you want to make sure it is the best loan for you.
What Is A SBA?
A small business administration (SBA) loan is a loan that is backed partially by the Small Business Administration (SBA) branch of the government. These types of small business loans are less risky for the lender because it is partially guaranteed by the government. The loan is still issued by a lender. If you cannot repay the loan, the SBA covers the part of the loan that they backed. It is almost like insurance for the lender.
The terms of this type of business loan varies based on the individual loan. There are no additional limitations on this type of loan because of its backing by the SBA. These loans range in amount from $500 to as much as over $1 million. They also can offer an interest rate as low as just below 7 percent. The repayment terms for a SBA range from 5 years to 25 years. The typical length of this kind of loan typically is around 10 years.
There are four different types of small business administration loans. There are micro loans, which are typically available to childcare organizations and small businesses. These loans are usually up to $50,000. Disaster loans fall into this category and they are reserved for damage sustained from natural disasters, such as, but not limited to hurricanes and flooding. There are real estate and equipment loans covering those items that are needed for the business to operate. Also, there is an all purpose small business loan that is the most common loan and that is the 7(a) loan. There are many business loan companies available to provide these various loans.
What Is Revolving Credit?
Revolving credit is a term typically related to credit cards. That is most likely where you have heard the term. It can be associate with small business loans, as well. The basic concept remains the same. You are not taking out a loan, per se. When you take out a loan, it is for a certain amount. The lender deposits that money into your bank account. You are responsible for paying it all back plus interest regardless if you use the money or it continues to sit in your bank account. The lender tells you how much you have to pay per month and for how many months. The lender is using the full amount of the loan plus the interest divided by the number of months you have to repay to get that number.
When it comes to revolving credit, it works slightly differently. A lender approves you for a certain amount over a specific period of time. However, you do not have to use that entire amount. It is not deposited into your bank account. It sits in the bank’s account. You take what you need when you need it. You only have to pay back what you borrow. The amount you pay each month is based on how much of the money you are using. The lender tells you how that amount is determined before you sign the agreement. Often, the interest rate is higher when it comes to a line of credit, but it gives your business much more flexibility.
What Documents Do I Need To Get A Small Business Loan?
As with any type of loan, you need to provide documentation when applying for small business loans. You have to supply more documents for a business loan than you do for a personal loan. The lender really wants to know all about your business before approving you for a loan. They also want to ensure that your business is profitable. They do not want to give you money if you are not investing it back into your business in a way that makes good business sense. I am sure it will not surprise you to know that the lender will not just trust you, they want to see the proof. You should have as much of this documentation available as possible before you apply for a loan. It can help expedite the process.
A lender may actually ask to see your resume and business license. You may have to provide your personal financial statements and the financial statements for the business and any principals that you have. They want to gather the credit history for you and all your partners, in addition to the credit history for your business. Lenders also want to see a guarantee of repayment from all the business owners. And they also want to see tax returns for you and the business for the past three years. They are especially interested in profit and loss statements. That means they want to see your balance sheets and all projections on cash flow. And they also want to see financial statements and any projected financial statements.
How Do I Know It Is Time For A Small Business Loan?
There are many reasons why small business loans may be right for your business. One of the most common reasons why your business may need a loan is because you want to expand. An expansion could mean a larger space because your business has outgrown the current space. You may have more work than you have people and need some new hires. You could have many orders you need to fill and you have to purchase more supplies. It is also possible that you need some new equipment or computers to make your business more lucrative.
These are all great reasons why you might need a loan. If borrowing money is going to put you in a better position to generate more revenue, then it may be time for a small business loan. Even if you have the cash to pay for some of these items, you might want to consider a loan. This helps you save your cash reserves and not dig into them. This can also help you build positive credit. All of these are positive reasons why you should consider a loan. Anything that can help you and your business grow and helps you find positive momentum should be great for your business.
What Do I Need To Consider When Thinking About A Small Business Loan?
There are some things you should consider before plunging into small business loans. You may ultimately decide you want small business cash loans, but first you should consider these steps.
- The first step is you need to think about why you want the loan. Is it a good idea your business? There are some excellent reasons when a loan is a good idea for your business. There are just as many reasons why it is a terrible idea for your business. You must consider if your reasons fall into the good or bad idea. Be honest with yourself. You may be putting your business at risk if you do not make a smart decisions.
- If you determine that a loan is right for your business, you need to be clear on how much money you need. It is important to make sure you obtain the right amount for a loan. If you ask for too little, you may not be able to pay all the bills. If you ask for too much, you may not be able to repay the loan timely.
- You should know your credit score. I talk more about this in the next section.
- Make sure your business plan is solid. This is a key step to your business. I go into more detail about business plans later in the article.
- Gather the financial documentation I talked about a little earlier in the article. It is not too far above this section if you need to go back and read it again.
Does My Credit Matter?
Your credit always matters. It does not matter if you want small business loans, personal loans, or even car insurance, your credit makes a difference. There are many sites available to assist you with pulling your credit report and analyzing the information it contains. You should pull your credit report and take a look at its contents before you apply for a loan. This is what a lender sees when determining if you qualify for a loan. If you know what is on your credit report, you can correct any errors it contains. You can also prepare yourself for how a lender may react to your credit report. This also helps you shop for the best loan for your business.
If you have a low credit score, many lenders will give you a high interest amount. Lenders tend to see you as a high risk when you have less than stellar credit. Your credit history shows the lender a picture of you as it relates to credit worthiness. The lender can see if you have a late or missing payment history. A typical credit score is anywhere from 350 to 850. Most people have a credit score between 600 to 750. Good credit falls between 670 to 800. Anything below 570 is the danger zone of bad credit. When you have bad credit, it is much harder to get a good interest rate. You may find it is difficult to be approved for a loan, if you have bad credit. It is still possible to get a loan, but you have to work harder and do more research.
Do I Need A Business Plan?
Yes, if you have a small business, you need a business plan. Even if you have no need for small business loans, a business plan is the most important thing you can do for your business. It is the roadmap for your business. How can you achieve results, if you do not know what they are? In short, a business plan is an outline of the goals for your business. It is a detailed description of how you plan to achieve those goals. It does not have to be long but you should have a formal document. You must have a written plan. It is great if you have all of these ideas in your head, but getting them on paper makes them real.
Once you have them written, you can share them with potential lenders and investors. You can print them and hang the where you can see them. They can be a reminder of your goals, especially during a time when you forget them. Your business plan can be a living document, which means it can change. As your business grows, you may expand or change your goals and your business plan changes. You may achieve results faster than expected which changes your timeline. You may hit snags along that you for which you did not plan. This may also change your plan.
You should make sure that your business plan includes an executive summary, an overview of your company, and your marketing plan. And you should include a detailed description of the financial plan of your company. You should provide a listing of the milestones for your company. Be sure to include information about your company and the services or products it provides. You might also want to include a short bio of anyone in management of the company and information of their role within the company.
Where Should I Look For A Small Business Loan?
When you are considering small business loans for your company, you must understand your company’s needs. Once you determine that, it might help you decide which is the best loan for you. It can also help you find the right lender for you. You should always do some research. There is so much information available to you online, there is no reason why you would not.
Remember, there are many options for small business loans, even online lenders. There are always the traditional banks available to you but they may not be flexible when it comes to the loans they provide. You may have better luck with credit unions of online lenders. They tend to be a little more willing to work with you and your business.
In California, you have some unique options when it comes to small business loans. The Los Angeles County Community Development Commission/Housing Authority has a loan to small businesses that specialize in areas such as manufacturing, clean tech, medical, and transportation development. The Valley Economic Development Center offers three different types of loans to small business owners in California. There are many more loan opportunities available. You just have to do some research to find them.
I have given you a lot of information to consider as it relates to small business loans. The one thing I would caution you to seriously consider before moving forward with a small business loan in California or any state is make sure you can repay the loan. This really is an important piece of information. You must be able to repay the loan. If you cannot repay the loan, you are putting yourself in a bad position. You are putting your business in a bad position. You do not want to set your business up for failure by taking on a loan that you already know you cannot repay.
Give serious consideration to how much you can afford to pay in a loan each month and do not go over it. We all have big dreams about what our business can achieve, but do not base your ability to repay the loan on money you hope to earn in the future. Use the income you are generating now to repay the loan. If you have more income soon, that is great. You can repay the loan sooner, or invest the money back into your business. But, you already know that you can repay the loan based on your old income. Always make smart, well educated decisions when it comes to your money.
Julia Peoples is a long-time business manager focused on providing decision making assistance to the public. She works with people at key points of their lives who are making important retirement and financial decisions. She has had many articles published that educate the public on sound financial decision making.
Julia writes for those who are working towards financial freedom or a better understanding of how finances work. She has shared her financial insights with individuals on a one on one basis for years.