Have you ever tried to start your own business? Then you know all the potential roadblocks that might come on your way.
In many cases, standard banks are not ready to risk their own money for a potential business that might fail, or they will risk it but with a catch, and that catch is having a high-interest rate. We all know that most private businesses fail, many of them will fail in the first year of being on the market.
We need to understand why banks that work by standard banking system are not so keen to give loans to the potential future business owner. But what if we tell you that there is a way to get financed by the companies that understand your struggle. That will believe in your ideas. And those companies are business loan funding specialists.
But what do experts think about Business funding? And what advice do they have for future business owners who need that extra cash? Well, let`s find out.
1. What alternative forms of financing are available to small businesses?
Sara Angeles – Connect with Sara on Linkedin
There are three main alternative forms of financing available to small businesses: crowdfunding, microloans and the SBA. Crowdfunding involves raising funds from large numbers of people. Funds can be considered as donations, loans or investments.
Typically, crowdfunding works by “backers” contributing a fixed amount of cash to the business, idea or project, for which they may receive a reward. With crowdfunding, however, this reward typically doesn’t include equity or ownership of the company.
Microloans (or microfinancing) consist of small loans given to entrepreneurs who have little to no collateral. Microloans sometimes have restrictions on what you can spend the money on, but they typically cover operation costs and working capital, or things like equipment, furniture and supplies. One example of a small business microfinancer is Kabbage, which offers microloans of $2,000 to $150,000.
The SBA also has its own small business microloan program. Instead of lending directly to businesses, however, the SBA distributes the funds to nonprofit community-based organizations, who then decide which businesses get the loans. Other SBA loan programs include general small business funding loans — known as the 7(a) Loan Program — real estate and equipment loans, and disaster loans.
2. You Might Not Qualify for an SBA Loan…and What to Do About It
Marc Prosser is Co-Founder of Fit Small Business
Loans that are backed by the U.S. Small Business Administration (SBA) are attractive for business owners because they offer a range of loan sizes, long repayment terms, and most importantly, low interest rates. While some alternative business lenders charge as high as 80 percent APR, you can get an SBA-backed bank loan for around seven percent APR, depending on the amount you’re looking to borrow and for how long.
So what’s not to like about SBA loans? Unfortunately, it can be difficult to get approved. Many businesses that want SBA loans get turned away by banks for one reason or another. Here are the five main reasons that SBA loan applicants get rejected, and a look at your alternatives.
Problem: You’re a startup
Solution: Borrow from other lenders that loan to startups
Most banks will not issue SBA loans to startup companies. They require a couple years in business or, when do they lend to startups, they generally expect the business owners to have experience in the industry.
As a startup, it can be hard to raise capital. Although the news makes it seem like every startup has millions in dollars of funding by venture capitalists, most startups are small local businesses. If you fall into that category, you will likely get rejected for an SBA loan, but you do have options.
You can borrow from a nonprofit such as Accion, a popular nationwide loan provider that specializes in lending to brand new businesses. You won’t be able to borrow too much money from such sources however—Accion lends a maximum of $30,000 to startups.
3. Research the Available Lenders
Richard Harroch – Connect with Richard on Linkedin
There are more lenders than ever before willing to lend to small businesses, and many of the lenders can be found from a simple online search. Here are the main types of lenders: Direct online lenders.
There are a number of online lenders that make small business loans through a relatively easy online process. Reputable companies such as Swift Capital provide very fast small business cash advances, working capital loans, and short-term loans in amounts from $5,000 to $500,000. Sites such as Fundera and LendingTree offer you access to multiple lenders, acting as a lead generation service for lenders.
Large commercial banks. The traditional lenders to the small business market are banks such as Wells Fargo, JP Morgan, and Citibank. These tend to be slower with more rigorous loan underwriting criteria.
Local community banks. Many community banks have a strong desire to make small business funding loans to local businesses.
Peer-to-peer lending sites. There are a number of sites that act as middlemen between individual and institutional lenders and small borrowers, including Prosper, LendingClub, and FundingCircle. These lenders can make decisions relatively quickly.
Bank lenders backed by SBA guarantees. A number of bank lenders issue loans backed by the SBA, and, as noted above, this backing allows the lenders to offer more attractive terms.
4. Getting Advice on Small-Business-Loan Criteria
Brian Hughes – CEO of Integrity Marketing & Consulting
I had a chance to sit down with Muhammad Ali, a financial expert and founder of The Bankly, an educational online resource that covers topics like small-business financing. Of course our topic was small-business loans.
“Not all businesses meet business loan eligibility requirements,” was Ali’s initial comment on this topic. “Most banks have an income eligibility threshold of 1.25 times your expenses, including the repayment amount. [So] even if you do meet the requirements, think carefully before taking on the loan, and be sure you can service the repayment terms.”
As a good rule of thumb, Ali advised choosing a loan with the lowest APR you can find, as long as your business can handle the payments. Most importantly, he said to do some “serious soul-searching” before starting the loan-application process.
Applying for a small-business loan can be time-consuming and emotionally draining,” he said. “Do your research in advance, so you go in fully prepared, with your eyes open.”
5. Getting a Small Business Loan is Difficult
Susan Ward – Connect with Susan on Linkedin
Unfortunately, financial institutions are notoriously reluctant to lend to small businesses – according to a recent survey by on-deck of over 10,000 business loan applicants in the U.S. 82% were denied financing by their bank.
Loaning to small businesses, especially startups, is a riskier proposition for banks than mortgage lending or lending to larger, established businesses.
In addition, given that the underwriting costs for evaluating, verifying, and processing a small loan is roughly the same as for a larger one, banks can increase their profits by focusing on larger loans to bigger businesses (small businesses typically request loans of less than $500,000). As well as being rejected for financing more often, smaller businesses also typically pay higher interest rates on loans than big businesses.
Consider that you may have an excellent credit rating and a solid business plan and still not be able to get a small business loan because you have no collateral. Even established business people can find themselves in this position, if they do not own enough tangible assets, such as houses or other property.
In other words, the small business loan is not being granted on the status of your business; it’s being granted on your personal financial status.
That’s why it’s important that your personal financial house is in order before you apply for a small business loan.
You will also find that many lenders just don’t provide seed money. While they’re perfectly willing to give a small business funding to help a business grow, they don’t want to take the risk of lending to a startup.
6. Failure to understand your credit score.
John Rampton – Connect with John on Linkedin
The Small Business American Dream Gap Report that was mentioned above, found that one of primary reasons why small business funding is often turned down because the owner weren’t aware of their credit score. In fact, 45 percent of the entrepreneurs surveyed weren’t even aware that they had a business credit score.
Additionally, 72 percent didn’t know where to find information regarding the credit score. Even more troubling, if they did, over than eight in 10 small business owners admitted that they didn’t know how to interpret their score.
Being aware of your credit score prior to applying for a loan will inform you if you have poor, or no, credit at all. If so, you can be certain that your loan application will be denied because you’re too too much of a risk.
You can check your credit score through companies like Experian, Dun & Bradstreet, FICO, and Equifax. The good news is that after your review your score, you can either repair or build your credit by making timely payments, keeping your debts low, avoiding opening up too many lines of credit, and keeping existing credit accounts open.
7. How to Improve Your Credit Before Applying for Business Funding
Sarita Harbour – Connect with Sarita on Linkedin
If your business financing application is rejected, research other options, like a home equity line of credit or consider an online loan option through an alternative lender.
Next, try to set up credit relationships with vendors — like suppliers, wholesalers, leasing companies and other financial institutions — who will report your payments to the business credit reporting agencies. Make all of your payments in full and on time to improve your business credit score.
Although getting business funding or business financing might be tough when you have bad credit, you have options. Don’t give up if the first answer is no — work on improving your credit, then try again.