Do you feel that you or your business will die before you get a loan from your bank?
According to the Small Business Administration while there have been several rather rosy reports lately claiming that small business lending has been on the rise, a closer look reveals that it is not an accurate picture of what is really happening.
From 2005 to 2007, big banks approved more small business loans than they denied. In the past few months, however, banks have reached an approval rate of about 19% of small business loan applications. Most of this lending activity is being directed to bigger, established businesses who now have three years of post-Recession sales under their belts and are thus more “bankable.”
It’s no secret that the biggest banks define “small business” as any company with revenue of $20 million or less. Even the SBA’s popular small business loan programs seem to be primarily helping medium to large companies, not the mom and pop operations down the street.
This 19% loan application rate means practically nothing for the majority of the nation’s small business owners who may be lacking perfect credit, have few assets to draw on, and who may be considered “high risk” by virtue of the industry they are operating in. These folks generally give up on getting outside financing or attempt to navigate the complex, choppy waters of alternative lending.
Since the recession, a growing population of alternative lenders have arrived on the scene to fill in the business financing gap, and many credit hungry small business owners have welcomed them with open arms. The Green Sheet estimates the market for Merchant Cash Advances is currently $500-$700 million, with the potential to reach $3-5 billion in another few years. The market for Invoice Factoring is even bigger. Morgan Stanley estimates that factoring produces $13 to $15 billion in revenue per year.
There is little wonder why. Alternative lenders offer quick, unsecured financing that downplays a business’ credit profile, and the funds can typically be used for any business need. Plus, more than two-thirds (67.3%) of small business funding requests are being approved byalternative lenders.
How are you doing with your loan application approval?
Are you thinking, “If only I could get a small business loan for my business.” What a common thought by many of us! Business owners need small business loans and access to working capital to start, build or grow their businesses. Statistics abound on the reasons why businesses don’t succeed.
Have you ever considered the lists of reasons why businesses fail?
- Poor or lacking leadership and business strategy.
- Inadequate or non-existent marketing plan(s).
- Not enough access to capital.
What are the 3 most common mistakes that entrepreneurs and small business owners make that makes it difficult or impossible for them to get approved for financing?
- Lack of Strategy
They don’t know what their borrowing options are. So they apply for a loan(s) without having any knowledge or strategy behind the plan. In other words, there is no plan or strategy.
A plan would mean that you know what you can and can’t do, based on the lending solutions that are available to small business owners. When you boil it all down, there are probably 10-12 primary types of debt solutions that do not require you to give up ownership of your business. Do you know what those are and which ones are the best fit for you? Things like credit, industry, seasoning, location, collateral, cash-flow, reserves, your need/purpose, etc. will all be factors that determine your options. Bottom line: With knowledge there is a path forward for you that either gets you that coveted financing now – or later. Get on that path and pursue your objective with a plan.
- Failure to Treat Your Credit as an Asset
You’re not treating your credit as the asset that it is – or could be. There are a couple of simple facts here. You either have excellent credit that is robust with no blemishes, and low utilization on your credit cards – or you don’t.
If you are part of the 10-20% that have this excellent credit profile, are you protecting and preserving it as you start, build and grow your business?
If you’re part of the 80-90% who have one or more issues with your credit (derogatory items, high revolving debt, etc.), what are you doing to intentionally improve your credit profile and FICO scores?
In the world of small business loans, you may not have as many options as you think just because you have great credit. But there are some good options when your credit isn’t so great.
The most common error here for small business owners is the improper use of credit cards. Don’t use personal credit cards for business. Why? One reason is because 30% of your FICO score is determined by your utilization percentage. Using personal cards guarantees you will hurt your credit profile and FICO scores. Ouch. Additionally, not all business cards are created equal. Some business credit cards report every month to your personal credit report. Ouch again. Don’t believe the hype about using personal cards for business because of their protection under the CARD Act.
Rates are higher since the CARD Act and you’ll hurt your credit if you use personal cards for your business. If you think you’re okay because you pay your bill in full each month, then think again. Credit card companies report the balances to the credit bureaus when they cut your statement and not after your due date. So 9 times out of 10, your balances are going to show on your credit report and lower your FICO scores. Paying your bill “on time” or “in full” will not change that.
- Failure to Build and Grow Your Revenue
You’re not building and growing your revenue. It’s true that your financing options will increase and get better as your business gets older. However, this is mainly true if you’re growing your company revenue. Remember, Peter Drucker said that business all boils down to innovation and marketing and it’s your marketing plan (did I have the nerve to say “plan”) that will help you grow revenues.
Do this and your success, for both your business and financing needs, are within reach. Plans require research. They mean nothing without execution. So your research should bring you to marketing solutions like inbound marketing, content marketing, direct mail, etc.
These are the three things that are commonly ignored by small business owners as they grow their companies. Be informed. Knowledge is power. Leaders learn and grow and figure things out. So put yourself in the minority by being prepared for the financing you need to get your business to the next level.
Nobody said it was easy. But it’s also not rocket science…thank goodness for that.
If you would like to hear from experts in financing who will share their perspectives on what a lender is looking for in a loan application and what you can do to get approval contact us. Find out how to prepare for the meeting with a lender and where to find free assistance in preparing a loan application. In a personal coaching session we’ll explain to you…
- A. Why banks are avoiding lending to small businesses like yours
- B. Why the Alternative Lending Industry is going strong and can help you
- C. Why you can get the loan you need with Alternative Lending
If you are one of the 80.6% of loans applications that have been denied or will be denied by your banks contact me now.
The Business Doctor