How to Get the Cash You Need to Start that Business You’ve Always Wanted

Let’s face it: With the oh-so-tough economy we’ve faced the past few years, most of us have focused on stability and security—and not so much the whole dreaming big thing. But if you’ve ever dreamed of owning your own business, now may be as good of a time as any to jump in. Can an average person living under average circumstances get a $2500 business loan? Yes. Americans at every income level are qualifying for and taking out loans to start or expand a business. In fact, as the economy begins to rebound, lenders are looking for good candidates for all different types of loans, allowing more people to realize their dreams every day.

Micro loans

Micro and mini loans are no longer only for hopeful entrepreneurs in underdeveloped countries. They are becoming more widely available right here at home.  The Wall Street Journal recently reported on a New York cab driver who hoped to start a fruit-importing business but was stymied by the reality of his finances. After paying his rent, the lease payment on his cab, and incidentals like food and cell phone, he had little left over with which to start his business.  This immigrant from Guinea had no credit history. A loan through regular banking channels was not available to him. He got his loan through the Business Center for New Americans, a non-profit organization with the mission of helping new arrivals to the United States reach financial self-sufficiency. Business Center for New Americans reports a default rate of about 6 percent.

Many large banks have turned away from making small loans, preferring instead to issue business credit cards, says Bob Coleman, of Coleman Publishing, a website focused on small-business finance. For large banks, the cost of processing a loan of any size is the same, and small loans earn comparatively little profit. Also, small businesses are generally in a weaker position to borrow, with lower credit scores and insufficient collateral. As a result, some businesses employing 10 or fewer people have found it difficult to obtain a loan through traditional channels.

Alternatives exist. The Small Business Administration distributed about $47.5M in microloans through 170 nonprofit lenders last year, the largest amount in the SBA’s twenty-year history.  During the last ten years, the average SBA microloan size has declined from roughly $14,200 to $11,750. Small for-profit lenders offer loans between $20,000 and $50,000 that are partially guaranteed by the SBA.

Grameen America, a lender that has partnered with the SBA, has made more that 25,000 loans with an average amount of $2,200 in the past four years. Grameen reports a default rate close to zero.

Mid-sized options

When Sara Ross, owner of Kickass Cupcakes in Boston, wanted a $75,000 line of credit from her bank (Winter Hill), they declined. She shopped around, taking her request to Sovereign Bank, where she was approved. Joseph Willen, owner of Advantage Title, had to shop around for favorable terms as well when he wanted a $500,000 equipment loan – which he finally obtained at 4 percent for five years.

Loans for the rich?

Wealthy buyers who could pay cash but instead decide to apply for a loan will find some banks less than welcoming. They often do not meet typical lending requirements, due to insufficient debt or no credit score. In some cases, the lender requires a larger down payment (on a mortgage) or significant liquid assets as collateral for the loan.

But posting collateral can be an onerous chore. And terms for such loans may be far less favorable than terms for traditional loans. In addition to restrictions on the use of your collateral assets and a higher down payment (up to 40%), lenders might also charge a higher interest rate or withdraw any fixed-rate option. A hefty balloon repayment structure, with a large amount due in just a few years, is not uncommon.

Some lenders will offset a marginal credit score if the borrower has substantial savings or a significant brokerage account.  And a little shopping around reveals that smart banks are indeed courting buyers who are sitting on large amounts of cash.  Large lenders are offering deals – discounts on rates and closing costs, for example – to wealthy individuals who meet minimum requirements. At Wells Fargo, $1 million in the bank, and at Bank of America, a mere $250,000 gets the loan red carpet rolled out for you.

The money is out there. What’s your dream?