The economic output of the State of New York in 2019 was over $1.7 trillion[i]. Yes, that is T for trillion. This would make the state the 10th largest economy[ii] in the world if it were an independent nation. New York City GDP was $1.5 trillion[iii] in 2019, which is largest in the US, is bigger than Spain, and would be 13th[iv] in the world if it were an independent country. New York accounts for less than 1% of the land area of the US but is responsible for nearly 10% of its economic output[v].
According to the New York State Office of Small Business, roughly $1 trillion of the economic output in the New York City and New York State comes from small businesses. According to the Small Business Development Center of New York, small businesses make up 99.8 percent[vi] of all New York businesses. New York small businesses employed 4.0 million people, or 50.2% of the private workforce[vii]. Considering these facts, one would think that ensuring the vitality of the New York and New York City small business would be a national priority. Sadly, it is not.
In terms of the Payment Protection Program, it looks a lot more like a Red State bailout than a Blue one.
While we are a thriving business community, we face unique challenges that businesses in the rest of the country do not face. This is especially true compared to those in the regions that benefited the most from small business lending programs from the SBA, namely the Paycheck Protection Program or the Emergency Disaster Loan Assistance. These SBA programs were not designed for New York small businesses. If they were, they would not limit the amount of funds allowed to be used to cover our most pressing challenges.
We have the highest minimum wage standards in the United States. We also have the greatest concentration of skilled laborers in the country. Together, this leads to payroll being the largest expense in most New York small businesses’ budgets and why the mismanagement of the Paycheck Protect Program stung so hard.
Behind payroll, rent is the second largest expense for New York small businesses. Commercial rents are not rent-controlled, as residential rates are. They are all market rates, which can make running a small business in New York uniquely challenging.
Living in a large and progressive city means complying with a bevy of different regulations, payroll tax liabilities, etc. Unlike many other states, New York State does provide several free services and genuinely tries to help small businesses manage compliance. As well-intentioned as these programs are, they are typically staffed by volunteers, so you are at the mercy of their schedules, skill set, and knowledge. It is the luck of the draw. Some are good. Others are not. None will hold your hand.
“The one thing I love about New Yorkers is that we are not afraid of challenges. We are tough. We must be. So, even if the federal government is giving us the finger, we are not going to give up. That’s not part of our DNA.”
Lenders range in size and scope from small and independent start-ups to big banks with names everyone knows. When it comes to getting a loan, it is more about finding the right fit than it is about just making it work for your business.
It is unlikely that you will qualify for a commercial bank or an SBA backed loan with a personal credit score is less than 700. This is also true for any partner or part-owner of the company. The bank will look at the credit score of anyone who owns 20% or more of your company. It may seem counter intuitive, but it is reality.
There is a simple accounting test that most lenders use to judge the maximum amount that they will lend. It is a ratio of your yearly income divided by twelve times your expected monthly loan payment. It is a measure of the cash you will have available to cover your debt payments. Most lenders will want to see that ratio be between 1.15 and 1.25, meaning that you have at least 15% to 25% more cash than you will owe in debt. This is a tricky calculation, but it’s important to know this number BEFORE you apply to any of the lenders below.
Traditional large, brand name banks, require a minimum credit score of 700 for New York business loans. Even if they say otherwise, do not bother. Move on. Every loan application requires a hard credit pull on your personal credit. If your credit score is below 700, do not do it. Your score will take a small hit so it’s not worth it. If you do have a score above 700, it’s not all smooth sailing, but you are in a MUCH better position. The higher the score, the more leverage you have.
If you have time and have been in business for over 2 years, the hands-down best option is an SBA backed loan. There are specific restrictions for an SBA loan, which you can find on SBA.gov. The benefit is the SBA will underwrite (take the risk from the back) a portion of the loan. This lowers the risk to the bank, which translates to a lower interest rate for you.
If you don’t qualify for an SBA backed loan, large banks tend to have the best rates, but it doesn’t hurt to look around. You may want to explore a small, regional bank. Because if you aren’t a large customer, you may receive better service. However, the trade-off will be convenient.
Both large and small banks offer commercial loans, but since they will be taking the risk, these are typically shorter in term less than 4 years and usually higher in interest rates.
These also require a minimum credit score of 700. Even if they say otherwise, do not bother. Move on, as above.
Smaller, regional banks tend to process more SBA loans as a percentage of their total number of loans. Therefore, you may receive better service as a small business, especially if you move your other accounts to the bank.
Credit Unions tend to be a bit more forgiving for New York business loans. They vary in their ability to offer SBA backed loans, so you may be better served by the two options above. Just do your research first. The key advantage of a credit union is they do not have the same profit drivers as banks do. Therefore, they can offer commercial loans at lower rates.
In recent years, there has been an explosion of small business lenders (SBL) for New York business loans. This is a good thing, right? Yes, but buyer beware. For some businesses, this is a godsend. For others, it could be a one-way ticket to bankruptcy.
Yes, bank-speak. In plain English, it means the bank won’t sell your loan. Many lenders sell loans to others at a discount to reduce risk. As a consequence, balance sheet lenders are more cautious and will go through more scrutiny since they are the ones carrying the risk. The SBA was created in part to help mitigate some of this risk, and many of these lenders will steer you to these products.
These lenders can also be called peer-to-peer, although this name is fading. As the name implies, these lenders post your application to their network of investors. Interest parties will be aggregated into a final loan offer. Since the risk is distributed, these lenders tend to be a bit more forgiving with respect to credit score and time in business. However, you will pay for that generosity through generally higher interest rates
As the name suggests, these are platforms where an algorithm reviews metrics from the application to match borrowers to particular lenders. This provides an opportunity to comparison shop across a broad range of lenders and loan products. This can be helpful for people who don’t have time or the expertise to comparison shop on their own. While these are helpful, they are limited to the number and types of lenders in their network. They are typically alternative lenders, which mean higher rates than a traditional bank. There will be a service fee attached to the loan as well.
Payment companies are also getting into the act. Paypal and Square are also offering loan products. They are relatively new, but also offer an alternative route to traditional lending.
If you are in a place where your personal credit is not great, and you need cash fast, merchant cash advances are available. But, use them as the last resort and even then, be wary. This is incredibly important, so we will reiterate: do NOT use merchant cash advances unless you have no other choice. If you do, you likely will find yourself falling deep behind the eight-ball in a matter of days or weeks. Merchant cash advances are essentially high interest “loans”. They have access to your bank and generally require daily payments, personal guarantees, and waiving of rights. Some are legit. Many exist only to rip off people who need money for their businesses. Never turn to this option without guidance, or you could find yourself facing bankruptcy quickly. The “interest rates” can be deceiving.
These are NOT loans in the traditional sense. Most are contracts where you agree to pay a certain amount in the future for a given sum today. Many will put percentages, which look like interest rates. But, always read the fine print. The true interest rate is rarely what is put on the agreement. You should calculate it yourself or ask someone to calculate it for you BEFORE you sign.
Personal guarantees are when you put your own personal assets up as collateral. Many people mistakenly believe that their legal business structure protects them from personal risk. But, that’s not the case if you sign a personal guarantee. Your personal assets can be seized to pay your debt.
Finally, these lenders typically ask for access to your business account so they can withdraw payments. These can be frozen if you miss a day. Also, there is a general waiver of rights in these contracts that make it easier for them to get a court order. In summary, if you don’t have to use them, don’t.
If you find that you are not a good fit for one lender because of debt or bad credit or any other common factor for businesses, then there are ways around it. The one caution we will stress is DON’T go shopping. Every application is a hard pull on your personal credit report, which will only make things worse. This is why it is best to educate yourself on the lending ecosystem to narrow down the list to those that you are most likely to qualify. This isn’t like college where you have stretch and fallback school. Each application counts so make sure you place safe bets.
There are some platforms like Lendio or Lending Tree that can provide approximate rates without a hard pull on your credit. They are a good option to explore if traditional banks aren’t available to you, so you can have an idea of what the interest rate might be. To offset high rates, you may choose to split your total raise with some of it coming from non-profit lending groups, like KIVA, that offer 0% interest rates.