Complete Guide to Business Financing in Puerto Rico: Options for Growing Your Business

Wed | October 2024

Accessing the right financing is essential for the growth of your business in Puerto Rico. If you need to cover expenses, buy equipment, or renovate, there are business loans and financing options for you. From traditional banks like FirstBank, Banco Popular, and Oriental Bank to innovative revenue-based financing solutions from One Park Financial, you have a variety of alternatives to consider.

Remember that each financing option has its own benefits and requirements. Choose the option that best aligns with your business goals. It will help you optimize your investment and focus on what matters: growing your business.

Don’t miss the chance to propel your company toward success. Check, choose, and take the next step toward growth today!

1.Traditional Banks in Puerto Rico

Traditional banks in Puerto Rico offer a variety of financial products designed specifically to meet the needs of small and medium-sized business owners. From term loans to lines of credit, these options allow you to access the capital needed for your business's different growth and operating objectives.

Term Loans

In traditional banking, a term loan is a type of financing with a defined repayment period, which can be short, medium, or long term. For business loans, banks in Puerto Rico typically offer medium- to long-term term loans, designed for investments that help your business grow.

These loans are ideal for financing projects that require a significant investment and will generate future income. For example, term loans are commonly used for:

• Equipment purchases: Machinery, vehicles, software, and other assets needed for operations.

• Facility expansion: Renting or purchasing a new location, renovations, and improvements.

• Property acquisition: Such as buildings, land, or storage facilities.

If you’re considering applying for a term loan, it’s essential to understand some key terms that will impact how you manage and repay the loan:

• Loan amount: This is the amount of money you request from the bank. It can vary based on your business’s needs and the bank’s assessment of your repayment ability. Generally, the better your credit history, the higher the amount and better terms you may be able to obtain.

• Interest rate: This is the cost of borrowing money, and there are two types:

  • Fixed rate: Remains the same throughout the loan term, providing stability in your monthly payments.

  • Variable rate: Can change over time based on market conditions, meaning your payments may increase or decrease.

• Term: This is the time you have to repay the loan in full. For business term loans, the term is usually between three and seven years, although it may vary depending on the bank and the type of investment.

• Installments: These are the fixed monthly payments you’ll make over the loan term. Each installment includes:

  • Principal: A portion of the loan amount, which reduces the total balance owed.

  • Interest: Interest refers to the price charged by one party for temporarily transferring its capital to another. It is the cost of a debt, i.e. how much you will have to pay for the money you are being loaned.

These fixed payments allow you to gradually reduce your debt until the loan is fully repaid.

Lines of Credit

A line of credit is a flexible type of financing that gives you access to a specific amount of money without requiring you to borrow a fixed sum or use the entire amount at once.

It works on a revolving basis, similar to a credit card: you can withdraw funds as needed and only pay interest on the amount used. As you reduce the balance with your payments, the amount you've repaid becomes available for use again.

Lines of credit are ideal for covering recurring financing needs and operational expenses, such as:

• Salaries, rent, or supplies: To help keep daily operations running smoothly.

• Inventory investment: Increase inventory to meet demand, especially during peak seasons.

• Unexpected expenses: Cover emergency repairs or any unforeseen costs that may arise.

In addition, a line of credit can be useful for seizing growth opportunities, such as launching a new product or expanding into a new market.

There are two main types of lines of credit:

• Secured line of credit: Requires you to offer an asset as collateral (property, vehicle, savings account). If you fail to make payments, the bank has the right to sell the collateral to recover the borrowed funds.

• Unsecured line of credit: Does not require collateral; approval is mainly based on your credit history and repayment capacity. This type of line of credit is usually more accessible for small businesses that do not have assets to offer as collateral.

Both types of lines of credit are available in Puerto Rico, although specific conditions may vary between financial institutions.

Some key benefits of a line of credit include:

• Flexibility: You can access funds as needed, giving you control over the timing and amount of each withdrawal.

• Convenience: You only pay interest on the amount you use, which helps keep costs low if the line of credit is not used frequently.

• Credit building: Maintaining a good payment history on the line of credit can improve your credit score, making it easier to access financing in the future.

Small business lines of credit are subject to credit reviews and annual renewals, and the lender sets a maximum credit limit. This type of financing is particularly useful for covering short-term operational expenses and optimizing cash flow efficiently.

Now that you know more about these financial products, we have prepared a comparison table that summarizes the main characteristics of the business loans offered by three of the most popular banks in Puerto Rico: 1FirstBank, Banco Popular, and Oriental Bank.

This table allows you to compare financing options and determine which one best suits your business's needs and conditions.

Comparative Table of Traditional Banking Loans: 1FirstBank, Banco Popular, and Oriental Bank

Notes:

1. Interest rates may vary and are subject to market changes.

2. Additional requirements may include interim financial statements, personal financial statements, filed income tax returns, and other specific documents.

3. Fields marked as "Not disclosed" for Oriental Bank indicate that we have not yet obtained this specific information, but we are working on it.

4. We recommend verifying the information directly on each bank's website or by contacting them, as requirements may change depending on the type of business.

Additional Considerations:

• Additional Costs: Besides the interest rate, consider commissions, transaction fees, and penalties.

• Collateral Requirements: The required collateral may vary based on the loan amount and your credit history.

• Application Process: Research each loan's requirements and processing time, as these vary by bank and loan type.

• Bank Relationship: A good relationship with your bank may facilitate better terms and faster approval.

Before deciding, schedule an appointment with a financial advisor to discuss your options and clarify any doubts—request quotes from several banks to compare interest rates, terms, and requirements. Comparing different options will allow you to negotiate better terms and find the most economical and flexible financing solution for your business.

You can check each bank's specific requirements on their website or by contacting them directly:

• Commercial credit products with 1First Bank.

• Credit solutions for your business with Banco Popular.

• Online commercial credit with Oriental Bank.

Now that you're familiar with traditional financing options, it's time to explore more flexible alternatives tailored to the unique needs of your small business.

In the following sections, we'll look at how SBA loans and other alternative financing options, like revenue-based financing, could be the solution you're looking for—even if your credit history isn't ideal yet.

2. SBA Loans Puerto Rico

Small Business Administration (SBA) loans offer small businesses the financing they need to grow and expand, with competitive interest rates and flexible repayment terms.

These loans are backed by the U.S. government, which reduces the risk for lenders and allows businesses to access better financing conditions. However, due to the government guarantee and eligibility requirements, these loans can take between 30 and 90 days to be approved, as the SBA reviews each loan to ensure it supports economic growth.

The primary uses of SBA Loans include the following:

• Starting or acquiring a business: Financing the creation or purchase of an existing business.

• Acquiring machinery and equipment: Obtaining capital to purchase income-generating fixed assets.

• Purchasing inventory: Financing the necessary stock for business operations.

• Improving or purchasing commercial property: Funding the acquisition or renovation of real estate.

• Debt refinancing: Consolidating existing debt to improve cash flow.

Key benefits of SBA loans include:

• Competitive interest rates: Thanks to the SBA guarantee, lenders can offer lower rates, which may be fixed or variable.

• Longer repayment terms: SBA loans can extend up to 10 or even 25 years, allowing for lower monthly payments.

• Higher financing amounts: The SBA offers loans ranging from $500 to $5.5 million, providing significant capital for growth projects.

SBA Loan Comparison Table in Puerto Rico

This table summarizes key features of SBA loans offered by FirstBank and Oriental Bank in Puerto Rico, allowing you to compare loan types, available amounts, permitted uses, and basic requirements.

Glossary of Terms:

• 7(a) Loan: The most common SBA loan program, designed to provide small businesses with flexible funding that can be used for various purposes, including working capital, purchasing equipment, and acquiring property.

• 504 Loan: A specialized SBA loan used specifically for financing fixed assets, such as commercial real estate and equipment, through a shared funding model. This program involves three parties: a lender, the SBA, and the borrower, each contributing a portion of the project's cost.

• 50-40-10 Formula: This is the funding structure used in the SBA 504 loan program, where the lender provides 50% of the project cost, the SBA guarantees 40%, and the borrower contributes 10%. This model reduces the borrower's financial burden and makes it easier to acquire high-value assets.

• Working capital is the funds a business needs to support its daily operations, including expenses like inventory, payroll, and other ongoing costs essential to keeping the business running.

• Real estate: This means physical properties owned by a business, such as land, buildings, and other structures used for commercial purposes.

Specific requirements and terms may vary depending on the lender and your business's situation. For personalized information, it is recommended that you consult a financial advisor or bank representative. For more details, visit the SBA website, where you can find additional information on the different types of loans and their requirements.

3. Alternative Business Loans

Alternative financing refers to any type of funding obtained outside the traditional banking system. If your business doesn't qualify for a bank loan or SBA loan due to strict requirements, alternative financing options can provide much-needed capital to fuel your growth.

Revenue-Based Financing

Since 2015, One Park Financial has been recognized in Puerto Rico for providing alternative financing solutions to small and medium-sized businesses, especially for those with growth potential (monthly gross revenue of at least $7,500) who may face challenges with their personal credit history.

One of the most popular options offered by One Park Financial is Revenue-Based Financing (RBF). This model links financing directly to the business's revenue streams. This type of financing works as follows:

• Application and document submission: To start the process, complete an online application and submit your business's financial statements from recent months. This helps assess your business's revenue flow.

• Advance on future sales: Once approved, you receive an advance of capital, ranging from $5,000 to $500,000, which can be used for various needs, such as purchasing inventory, payroll, or acquiring equipment. This capital can be available within just 48 hours after completing the application and submitting documentation.

• Payment based on a percentage of revenue: Instead of fixed monthly payments, you make payments based on a percentage of your future revenue, either daily or weekly. This means your payments adjust to your business's performance—if you have less income in a period, you pay less.

• No collateral required: You don't need to provide collateral to access this type of financing.

To qualify for financing with One Park Financial, your business must meet the following requirements:

• Time in business: You must have at least 3 months of operation.

• Monthly revenue: Your business should generate $7,500 or more in revenue.

• Credit history: Applications are accepted with a credit score of 500 or higher.

• Industry: One Park Financial works with most industries.

One Park Financial’s financing could be ideal if:

• You need capital quickly.

• You have recurring and stable revenue.

• You don't qualify for a traditional bank loan.

• You're looking for a flexible financing solution.

If your business meets these essential criteria, you could be an ideal candidate. Complete the online application and pre-qualify today. One of our agents will contact you to discuss the available financing options.

Caribe Federal Credit Union

Founded in 1951, Caribe Federal Credit Union is a nonprofit cooperative with over 70 years of experience in Puerto Rico. According to its website, it has the support of more than 54,000 members and assets exceeding $693 million.

Caribe Federal offers a variety of financial products and services, as well as financial education resources for its members. However, it's important to note that, as a cooperative, its processes may take longer.

For business loans, specific terms and conditions at Caribe Federal Credit Union may vary based on the type of loan, application evaluation, and the applicant's credit score. While their website provides full details of each loan option, we've created a summary of the main business loans available from Caribe Federal Credit Union in Puerto Rico, along with the key details you should know:

Comparative Table of Business Loans from Caribe Federal Credit Union

General Loan Features:

• Terms: Vary depending on the type of loan, from 90 days to 25 years.

• Interest Rates: Can be fixed or variable, depending on the specific product.

• Collateral: Some loans require mortgage collateral or a guarantee on the financed equipment.

• Requirements: Specific requirements vary by loan type but generally include a good credit history and stable cash flow.

Benefits:

• Flexibility: A variety of options to meet different business sizes and needs.

• Competitive Rates: Offers attractive interest rates.

• Personalized Attention: Specialized advice for each client.

• Community Support: Committed to Puerto Rico's economic development.

In summary, Caribe Federal Credit Union is an excellent choice for entrepreneurs looking for financing to grow their businesses. Keep in mind that the application process may take additional time due to the cooperative structure.

Find the Ideal Financing for Your Business in Puerto Rico

As we've covered throughout this article, choosing the right financing is essential for growing your business. Each type of financing offers unique benefits, from traditional bank options to alternative solutions and credit unions.

The most crucial step is to evaluate all your options and understand your business's specific needs, including cash flow and investment opportunities, to make the best decision and build your business credit. We hope you found this article helpful and that you now have a better understanding of how to get your business funded in Puerto Rico.

If you have an immediate investment opportunity in your business and need capital fast, we can help. For over 10 years, we have helped thousands of small business owners on the island acquire capital quickly to take advantage of a growth opportunity. Don't wait—fill out this quick 2-minute pre-qualification form and get an offer for your business today!

Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.