Bank lending to small businesses has declined terribly, especially since the big banks started eating up community lenders. Small business owners have an 80 percent probability of being denied funding. There are various factors to blame for the decline in small business loans, including increased regulation, a downturn in community banking, and the lower profit margins on smaller loans.
Below are three exercises – specifically designed for small business owners – that will ensure you join the ranks of the 20 percent that secure funding for their ventures.
Decide which type of loan is right for you
The purpose for the extra funding will dictate the type of small business loan you get. For example, you’ll want a short-term cash flow loan, a line of credit, or accounts receivable financing if you just need to manage day-to-day expenses. On the other hand, a term loan is better for growing your business by expanding to a new location.
You should also look at alternative sources, such as account receivable financing is also known as factoring and asset-based financing. The latter is similar to securing a conventional loan, where a lender will assess inventory values, accounts receivable, and fixed assets in order to establish whether or not you’re creditworthy. Based on their findings, they may issue you a line of credit. When companies choose the factoring option, they sell their accounts receivable to get a short-term loan for up to 80 percent of the value of the accounts receivables provided.
Alternative lending has filled a gap left by risk-averse large banks. Alternative lenders tend to embrace technology, and sites such as Lendio are available to small businesses wishing to compare lending options. This is a boon for small businesses, as it offers transparency in what has traditionally been an opaque and confusing market.
Choose the right bank for your business
Choosing the right bank can be difficult when offerings for small business loans look so similar. If you already have a good relationship with your bank, that should be the first stop. Banks that know your backstory might better understand your needs.
Keep in mind that your first loan will often be the hardest one to secure. Banks prefer to fund businesses that they have lent money to at least once, and which have repaid at least one loan in a timely manner. Unlike venture capitalists or angel investors, banks tend to go after low-risk customers with proven ability to pay them back.
If you’re unable to secure financing from your own bank, find another bank with an understanding of the business or industry you’re in. Credit unions should also be considered, since their terms and conditions tend to be more flexible, and they might be more willing to listen to your case.
Lendio can help by matching you with the perfect bank for your business model or industry. Use Lendio’s tools to help you shop around before you start the lengthy application process. Be sure to compare interest rates, terms, and eligibility requirements.
Demonstrate why your business is a good investment
Pretending to be risk-free is a bad idea, but you should be clear about what the actual risks are. Show that your business has a good model, with an active target market. Your background, resume, business plan, tax returns and associated financials, and references should help you present yourself as one who will responsibly pay back a loan. Paying down your personal debt and getting your credit score as high as possible prior to applying are also good ideas.
Many small business owners go into their loan interviews without pertinent documents, unable to explain the reason for their funding request, and generally showing that they lack confidence. You need to turn all of that around in your quest to demonstrate why your business is a good investment. You also need to know what you’re offering as collateral, and/or if you’re in a position to personally guarantee the loan.
As you prepare to speak to your bank of choice, keep in mind the ten common areas of focus that banks use to measure default risk:
- Your industry
- How long you’ve been in business
- Your profitability
- Your business model
- Your credit history
- Whether or not you’re willing to make a personal guarantee
- Liens, lawsuits, and tax liability
- Your equity in the business
- Purpose of the loan
- Concentration of your receivables
So how difficult is it to get a business loan today? While lending has declined, it’s getting easier than it was immediately following the financial crisis. The battle to find capital to fund small businesses is easing, though this does not guarantee that each loan application will be sanctioned. In spite of the decline, it’s a good time to go to banks for funding, whether your business needs new equipment, room to expand, or working capital. The better prepared that you are with proper documentation and having a strong compelling story about how your business will utilize the new capital, the better your chances of success.