How to Qualify for a Business Loan in Colorado: What You Need to Know
Qualifying for the right funding program to make your small business dreams come true can be challenging. More so if traditional lending options fall through while the business is desperate for a capital infusion.
The good news is, there is no shortage of business loan options in Colorado, even if you can not qualify for a traditional loan. However, you need to do the necessary research to find out what works best for your business.
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Understanding Your Business Loan Options in Colorado
Having access to business loans at the right moment can make or break your dreams of making it big. While there are various business loan options available in Colorado, you need a plan that is designed to meet your specific financial needs. To choose the option, consider three main aspects: the type of loan you qualify for, when you need the funds, and the purpose you need it for.
Types of Loans Available
Here are the main types of loans that small businesses in Colorado commonly choose.
Traditional Bank Loans
Traditional bank loans can be received from regional or local banks and are generally considered the benchmark when comparing available lending options. Borrowers with good FICO scores and business cash flow can expect better interest rates from banks. However, the lending regulations tend to be more rigid than alternative lenders. The interest rates, fees, and repayment periods related to a loan can vary depending on the bank, and shopping around to find the best option is a good idea.
Small Business Administration (SBA) Loans
The U.S. Small Business Administration (SBA) helps small businesses get affordable bank-rate financing. The loans are not given by the SBA directly, but by banks, credit unions, and online lenders that work with the SBA. The SBA not only caps the interest rates but also guarantees between 75% to 90% of the loan, reducing lender risk. The most popular choice is the standard SBA 7(a) loan, which has a lending limit of $5 million. The eligibility requirements are fairly strict, and the approval period can be long.
State and Local Loan Programs
State agencies like the U.S. Department of Agriculture (USDA) offer financial support through programs like the Rural Microentrepreneur Assistance Program. The Colorado Startup Loan Fund provides capital to small business owners unable to obtain funds from traditional lenders.
Besides, there are reputed regional agencies that offer loans to small businesses. In Colorado, Energize Colorado offers efficient lending services, especially to small businesses in need of financial support. Our easy lending process allows businesses to get around the hassles of red tape and get quick access to funds. Besides loans, we also offer tailored guidance to help businesses navigate through a complex market. We ensure competitive interest rates for all loans, but do not fund any complex renovations that would require a permit.
Alternative Lenders
Alternative funding options, including online and fintech lenders, can provide access to fast funding. The application process is simpler, and the eligibility requirements are flexible. On the downside, the interest rates are higher and the repayment periods are shorter. Some of the options are microloans, merchant cash advances, invoice factoring, and bridge loans.
Another popular option is peer-to-peer or P2P lending, which directly connects borrowers to individual lenders through an online lending platform. However, the process is not FDIC-insured, and the risk factors are higher for both borrowers and lenders.
Speciality Programs
Women, minority, and veteran-owned business programs
The lending landscape tends to get complicated for women, veterans, and minorities. Unfortunately, women business owners often find it harder to secure loans than their male counterparts. While inequities exist, some of these individuals may not have a consistent credit history needed for a traditional loan. Apart from special SBA loans for veterans and women, there are local business lending programs and grants that support women, veteran, and minority-owned small businesses.
Agriculture and energy sector lending
Small businesses in rural areas and agricultural producers can apply for loans through the Rural Energy for America Program (REAP), controlled by the United States Department of Agriculture (USDA). The loans are provided to businesses looking to make energy efficiency improvements or to invest in renewable energy systems. This is a great option for small businesses willing to advance Colorado’s clean energy transition process while boosting the rural economies.
Community Investment and Rural Development Funds
The Community Development Financial Institutions Fund (CDFI Fund) helps promote economic growth for distressed communities. Only the entities certified as Community Development Financial Institutions (CDFIs) can take advantage of these funding programs. Small business owners can get financing from these certified CDFIs, like banks, credit unions, or loan funds, in their locality.
Eligibility Requirements: What Lenders Look For
While every lender has their own methods of judging creditworthiness, the focus is on the five C’s of your business. These are character, capital, capacity, conditions, and collateral. At times, the lender might consider conditions beyond the borrower’s control, like the economy, industry trends, or expected legislative changes. Here are the yardsticks that are under your control.
Business Financial Performance
Most banks and financial institutions will evaluate your business’s capacity to meet the loan obligations while continuing the daily operations. Banks take a close look at the financial statements from the previous years and compare them with the industry standards. Analyzing multiple years gives them a better idea about the overall health of a business.
Lenders also consider the existing debt burden a business is carrying before agreeing to provide another loan. The net profit margins, cash flow stability, and the assets the business owns are evaluated to determine the capital and the business’s ability to repay. The business assets can be used as collateral depending on their loan-to-value (LTV) ratio. Banks also look at your management credibility to determine if you can turn the plans into reality.
Credit Profile
Your business (unless it is a startup), as well as your personal credit scores, are crucial components of determining creditworthiness. Credit scores work as report cards for your financial character. The scores will indicate if you pay your bills on time, and will also highlight any bankruptcies or tax liens. The higher the scores, the better the chances of a loan approval and getting a lower interest rate. Generally, high-risk businesses tend to have a lower credit score.
Business Plan and Documentation
A business plan allows leaders to understand the business purpose and operational plan. Lenders want to be sure that your business is viable and the plan is based on solid market analysis. The right plan will also highlight how the business plans to generate sufficient revenue while standing ahead of the competitors. The business plan should be accompanied by supporting documents like tax returns, bank statements, permits, licenses, and a detailed funding request.
Industry and Location Factors
Some industries like restaurants, accommodation, retail trade, and healthcare have a higher number of loan approvals. With high-risk or volatile industries, lenders usually have stricter terms to mitigate the risks. Since conditions like volatility affect the long-term predictability of revenue, the business’s ability to repay the loan is considered low. Such businesses require solid collateral to secure the loan.
How to Prepare a Strong Application
To start with, determine how much money you want to borrow based on your business needs. Remember, lenders, especially banks, do not prefer a business that wants to run 100% on loans. The owner should have some skin in the game to prove that they are committed to achieving the goals.
The next step is to organize the loan information. Start by stating the details of your business, the exact amount of the loan, and its purpose. Lenders want to know how the loan fits into your overall business purpose. Describe the purpose of your business, the ownership structure, and list the number of employees and current assets. Mention the experience, skills, and accomplishments of the management.
Add the product range, the market, and the customer profile to the application. Provide a clear idea of how the business plans to meet the customer requirements and overcome competition. Having a rock-solid business plan based on the current market scenario in Colorado indicates that you have thought deeply about business strategy and growth. Next, provide the financial statements of the past three years. These include balance sheets, income statements, and tax returns. Include a record of your credit history and make sure that there are no errors in it.
In case you need any guidance regarding the application process, the Energize Colorado team provides the necessary education and mentoring to help you make use of the best opportunities. Another option is to get in touch with the Small Business Development Centers to review the loan application.
Get Funding For Your Business
We’re thrilled you’re considering taking your business to new heights with our low-interest loan.
Click the “Get Started” button to take the first step of your application process by submitting our interest form!
The Application Process
Once you have compared lenders and chosen the right one, it is time to contact them to learn about the exact documents needed for the loan process. Gather the documents and submit them. If there are any missing documents, inform the lender about it and mention when you will submit them.
Make sure to communicate with the lender and be proactive about any issues that may arise during the approval process. The loan processing time or underwriting period varies widely, depending on the lender and the type of financing you need. It can vary from 10 days for quick loans to 90 days for SBA loans. If the loan is approved, you will receive a commitment letter mentioning the loan terms, and a loan closing specialist will guide you through the closing process.
Final Thoughts
With its favorable economic environment, Colorado is a flourishing zone for small businesses. Moreover, the combination of supportive policies and business funding initiatives makes the situation even more favorable for startups. That said, there is no one-size-fits-all solution to getting a business loan. It is a good idea to have an experienced voice help you pick the best option.
Energize Colorado is committed to developing the small business ecosystem in the state through technical assistance and capital resources. We understand the barriers faced by small business owners and provide them with the necessary resources to sustain long-term growth.