How to Apply for a Small Business Loan in California

On April 2, 2020, California governor, Gavin Newsom, announced that small businesses in the state would be provided with financial relief to help them deal with the hard economic times they were facing due to the coronavirus pandemic. Although he had issued an executive order extending the filing of sales tax to July 31, all the money collected will be retained by the businesses for the next 12 months, terming it as a bridge loan. While that is a commendable effort by the governor for his statesmen, the federal relief program amounting to $349 billion to help small businesses in the US was reported to be running dry on April 15, 2020, after being launched on April 3, 2020.

As people scramble for a slice of the fund, which is being approved on a first-come-first-serve basis, most business owners will be left out. Since California forewent the sales tax as income for the state, it is relying on that soon-to-be-dry federal stimulus package to help the business owners who might as well start applying for loans elsewhere. In light of this, you can learn how to apply for a small business loan in California here and equip yourself with other necessary information.

How to qualify for a small business loan

First of all, you must show that you can repay your debts. Therefore the lender will check on your history of repayment and the current debt to income ratio. Most lenders do not approve a loan if the ratio is not at least 1:1.2, meaning that for every $1 of debt, your business must earn at least $1.2. The other way to prove that you will repay is if your business shows the capacity to do so by having an excellent business plan if you are starting, good credit, and some capital.

Having a stake in the business helps to assure the lender of your commitment to success since you will also not want to lose your money. Hence the more the capital, the higher your chances of getting a loan. Additionally, you should provide some collateral in case you are unable to pay your debt so they can sell your assets and recover their money. For this reason, ensure you have assets worth more or equal to the amount of money you are asking to borrow.

While these conditions may seem enough to qualify for a loan, some lenders will still give or deny you money based on your character. They may, therefore, observe your general behavior while borrowing or look at your business’s reputation. Hence ensure you are on your best behavior when filling in that loan application. Of course, you should also be registered and operating legally.

Getting an SBA-backed loan

If you are looking to get an SBA-backed loan, you need to meet specific criteria despite the SBA-backed loans being hailed as available to any small business. First of all, do not bother applying for a loan if you can get a financial lending institution to lend you the money. For you to qualify, you must have exhausted other financing options since, legally, SBA can’t guarantee loans to a business that can get the loan on its own. Your business must also be in good standing, which dismisses the belief that SBA loans are to help failing businesses. SBA-backed loans are just like any other loans, and lenders need to know that they will get their money back

Additionally, for a business to be regarded as “small,” then size matters based on your annual turnover and number of employees. IBank clarifies this criterion as any business operating within California and whose employees range between 1 and 750. However, the maximum number of employees can vary depending on the industry in which your small business is operating.

If you manage to meet all the requirements which are a handful, then your loan will be guaranteed up to 95% and up to 7 years. However, you will need to apply directly to participating lenders who might also have their own set of requirements for you to qualify.

Other types of relief for small businesses

According to Mercury News, Governor Newsom is urging small businesses to apply for federal financial aid. Therefore if you do not qualify for a loan from your bank, you can opt to apply for an Economic Disaster Loan or Paycheck Protection Loan.

The governor explained that the Economic Disaster Loan presumes the applicant eligible for dollars in that loan account, meaning that you can get up to $10,000 as you wait for your application to be processed. You can get more than $2 million to be repaid within 30 years at an interest rate of 3.75%.

If you are having a challenge paying your employees, then the Paycheck Protection Loan might come in handy. The program provides the business with up to $10 million, of which 75% must go towards payroll. Small businesses with less than 500 employees are eligible, although freelancers are also being encouraged to apply. He explained that it is not a loan program but rather a grant for those who insist on paying their employees despite the pandemic.

Some small business are still on the losing end

With so many options for small businesses to ensure they keep their heads above water, street vendors in southern California cannot take advantage of them. According to LAist, street vendors are usually undocumented meaning that they may not have bank accounts or have proper documentation to prove that the pandemic is affecting their business.

The Paycheck Protection Program may be offering up to $10 million, but the undocumented street vendors can’t get a penny from the fund. To qualify, one must answer if they are subject to criminal information, indictment, arraignment, or other formal changes that could expose applicants to fraud if they say “no.” Additionally, the undocumented small business owners cannot get the $1,200 one-time payment from CARES. However, the governor is feeling their plight and allocated $50 million to small businesses, including those who are undocumented, through the California Infrastructure and Economic Development Bank.