Have you ever applied for a business loan? It's an uphill battle, even more so now than ever. How hard can it be? I found some sobering facts:
- 74 percent of all small business loan applications get turned down. Maybe as high as 90 percent. (Source: sba.gov)
- Banks are fighting over cream of the crop borrowers -- doctors, lawyers and CPAs or companies that have been around a long time with steadily increasing gross income year after year. (Source: FDIC website)
What's the reason that banks have put a tighter net on the money tree? I think it's fair to sum it up with two words -- profit and regulations. Despite any bad feelings we may have towards banks, they're in business to make money from lending. With such a low percent of net interest margin, the best possible outcome on a loan for these money making lenders is to get paid back all of its principal and make a small spread on the interest. Add the latest batch of regulations into the mix and you have a recipe for hard work on the part of loan applicants.
Best Financial Foot Forward
For those who might be having issues trying to deal with our beloved big banks, I contacted Brock Blake, Lendio's CEO, and asked him to provide some insights and tips along with some of my own:
1. Get Your Financial Act Together: Are your financials in a mess? Lenders are being super diligent because new rules have placed increased pressures on them to verify the ability of borrowers to repay their loans. As a financial controller, the first step I took whenever seeking outside funding for companies I worked for was to super-fine tune the financials:
- Lenders need to verify all the information you give via documentation. The more you show you've done your homework, the more inclined a lender will be to develop faith in you and your business. Keep good records.
- Your business needs to have been profitable for the past three years in order to qualify for a bank or SBA loan.
- Pay your bills on time.
- Report all of your income.
- Be ready to explain and demonstrate how the loan will be used.
- Most lenders require that recipients have some sort of collateral. If you have it, they shouldn't require a lien on your home.
2. Build Relationships: Professional relationships can work in your favor. Small business lenders want to know that your company is headed for success. "It's important to establish yourself locally," says Blake. "Building community relationships can take time. But the results are an important part of being a trusted small business, especially when you want to secure a loan."
3. Explore Your Options: As with any other major financial decision, it's always a good idea to explore all options before deciding on a final choice. A Merchant Cash Advance is one option that can work well. Merchant Cash Advance companies provide funds to businesses in exchange for a percentage of the businesses daily credit card income.
4. Know and Show: A vague loan request is a loser all the way around. Be ready to articulate and demonstrate how much you need and for what, and also the results you are likely to produce should the loan be approved.
5. In Other Words...Tell the Story of Your Company: If you can't tell the story behind why you need the financing, you can't expect someone to hand you a check. Blake's best advice to those who don't know how to fine-tune their pitch is to find help. It's not just about your past achievements but also about the future.
6. Weigh Your Business Character: Aside from crunching numbers, lenders also make judgment calls as to whether or not you are sufficiently trustworthy. "It's not uncommon for lenders to assess other considerations," says Blake. "These can be your education, your business and industry experience, as well as the quality of your references, the experience of your employees and your personal background."
7. Know Your Rights: This year, borrowers have many new rights courtesy of the Consumer Financial Protection Bureau. Be aware of these rights and put them to use.
8. Good Credit Rocks: It's nearly impossible to get a low interest rate loan without decent credit. It's important to monitor your credit history and score on a regular basis, in particular during the loan process. But as Blake says: "There are lots of alternative lenders who will loan to small business owners with bad credit. Even if you can't qualify for a loan from the bank, there are options -- they are just very expensive. You don't need a 720 credit score to get a small business loan, unless you're going to the bank."
9. Cut Overspending: People who will have little money left at the end of each month or who have too many debt obligations (credit cards, student loans, etc.) most likely will have problems. Keep your monthly debt obligations below 43 percent of your income.
10. Alternative Financing: Factoring, Asset-Based Loans & Loan Programs: Alternative financing is on the rise for those businesses that don't qualify for financing through traditional bank. "Small businesses can bridge the gap via asset-based lending or factoring," says Blake. "Asset-based lending is fairly comparable to the bank loan process, whereas factoring involves selling your accounts receivable for a short-term loan based on a percentage of the value."
Remember:banks are in business. All companies need to assess risk and make profits. Showing that you know and appreciate this will make a solid impression. Keep this in mind from start to finish, and be sure to address their side of the issue.
It's a relationship like any other. And the best relationship is a two-way street. Right?
Image licensed via GL Stock Images
Disclaimer: I do not have any personal, financial or business affiliation with Lendio.