A Small Business Loan, How to Get Approved
Throughout your life as a business owner, you will probably need to get a small business loan to address some issue or to get additional working capital through a business line of credit. Understanding how business owners get approved for a small business loan or a line of credit is an important first step. However, the truth is that very few small businesses will ever qualify for a loan from a traditional bank.
In addition, with the SBA loan, Paycheck Protection Program (PPP loan), and other coronavirus pandemic disaster loan programs over, small business owners can’t rely on the federal government.
Knowing what banks and other financial institutions will look for to approve small business financing is important.
Small Businesses and Small Business Loans
If you have ever awakened in the middle of the night because you are worried about making payroll, paying taxes or an unexpected payment that you cannot make, congratulations…you are a small business owner. You should also be aware that you are not alone.
Uneven cash flow is perhaps the number one issue facing many small businesses today. The main reason is that most small businesses bill their clients and then get paid back 30, 60 or even 90 + days later. Most small business owners have faced a cash shortage dilemma at one time or another and made it through so you can too.
Every business, big and small, should have a line of credit in place for such an emergency. Yet, most small businesses do not have a business credit line because it isn’t on top of a business owner’s mind unless there is a cash flow problem.
Let’s cover what the difference is between a business term loan and a business line of credit.
Small Business Term Loans versus a Business Line of Credit
A small business term loan is a larger fixed amount of money that you will be approved for after going through a lengthy application process usually with a bank. A small business term loan from a bank is often used to expand a business operation, start a new business or for equipment financing. A business loan is paid back over a few years through a monthly payment. If you want to pay a business loan off early then there is often a prepayment penalty. Traditional bank lenders will not only look at your business but personal finances as well to determine if you qualify. Term loans will almost always require some type of collateral and the personal credit score of you and your business partners will need to be over 680 to qualify.
A business line of credit differs from a small business loan in that a business line of credit is business financing you get in place but are not required to use. A business line of credit is a financing option that every business owner should have in place, just in case. However, only about 25% of business owners actually get a credit line in place before an emergency happens. The loan amount of a line of credit is often smaller than a small business loan and the loan terms are different as well. If you apply for a business line of credit with a traditional bank you can expect the application process to be very long. All bank credit lines require collateral and with small businesses, real estate is often the number 1 collateral used.
With small business loans, the interest rates are usually fixed like a mortgage whereas, with a business line of credit, interest rates are often quoted as prime plus x%. Prime is a number determined by the federal reserve that banks use in many financing products. The business needs for a line of credit is often for short term working capital to solve a temporary cash shortage issue.
The Challenges of Getting Approved for a Small Business Loan from a Bank
When banks do loan funds, they do so with the expectation that the money will be returned, with interest, and banks are looking for minimal risk. For this privilege, they look at a lot of indicators that you will actually be able to pay it back.
This reassurance comes with a lengthy loan application, a long-term repayment schedule, and mountains of paperwork to prove you are good for it. For you, the small business owner, it means you will have to provide meticulous information about how you run your business, and all your financial records and assets, even the personal ones. You will have to show that you have enough collateral to back up the loan, such as the equity in your home, a lot of quality accounts receivable, plus any other real estate you might own.
Once all this information has been received, the bank can still take up to two months to give you an answer. During this time, they will examine everything from your credit history to your character.
Also, it is important to note that you may have to repeat this process again and again as the first few banks you approach might say no to your small business loan application.
In general, working with a traditional or local bank will take a lot of time and require collateral.
The Ease of Alternative Lenders Like Financing Solutions
With a tight economy, banks are less willing to take a risk on approving any small business loan, making it harder than ever to get approved. In fact, due to the covid-19 and global recession, most banks right now are just not lending money.
Alternative lenders like Financing Solutions might provide a much better solution for small businesses not just because of the ease of getting a line of credit in place but because it is often cheaper than a traditional bank. Financing Solution’s approval for a business credit line is 48-72 hours and its online application process is only 2-minutes long. Even during this recession, Financing Solutions is actively providing business lines of credit to qualified small businesses.
What is an alternative lender? An alternative lender is a financing company that does not get money from the federal government but from private investors. As a result, this lender is not required to have collateral or personal guarantees. Financing Solutions does not require any collateral, personal guarantees and unlike a bank doesn’t charge your business until the credit line is actually used making it a different product than a bank line of credit.
Almost all lines of credit are used for the short term because they are most often used to fill a gap in cash. Although a business line of credit can be kept out a long period of time often the business credit line is used for a few weeks and then paid off. Because of this Financing Solution’s business line of credit is almost always cheaper than a traditional bank for small businesses.
Banks Don’t Really Want To Approval Small Business Loans
Banks make their money on very big loans because the underwriting process is the same for a big loan as it is for a small business lending. Therefore a bank will make a small business jump through hoops for any business financing.
If you are thinking of looking at the small business administration small business lending program then you should know that the federal government doesn’t actually provide small business loans. The SBA uses authorized banks to approved loans so the application process is very similar to a traditional bank. The SBA might be a better deal than a traditional bank because the required collateral might be less but be prepared for a lengthy application process. What the SBA does for banks is they will underwrite a portion of the risks of the loan should you default allowing the bank to be more lenient on who is approved.
The Case for a Business Line of Credit For Every Business Owner
In the past, business owners didn’t get a line of credit in place ahead of time because the application process took months. Dealing with banks has always been a pain in the neck. What changed was that in the 2008 recession banks stopped lending much like they are doing in the 2020 pandemic recession. Private investors have to put their money somewhere because the stock market was doing terrible so alternative lending companies began to provide small business loans and business lines of credit using private funds.
Alternative lenders like Financing Solutions saw that traditional banks just really had no interest in serving the needs of small businesses and quite honestly hadn’t adopted any technology to make the loan application process faster, easier, and cheaper.
Now the number 1 place small businesses are going to for small business loans are not banks but alternative lenders.
Financing Solutions is rated A+ by Better Business Bureau
Financing Solutions is rated A+ by the Better Business Bureau and 5 stars by Google Customer Reviews. FS provides a business line of credit up to $100,000 to small businesses and nonprofits. The credit lines cost nothing to set up and nothing until used making it a great cash back up plan. When customers use their lines they are inexpensive especially with the problem it solves usually relating to making payroll or unexpected expenses. The line is unrestricted meaning that your business can use it for whatever you like.
After filling out a simple 2-minute online application that requires no documentation, you will be sent a no-obligation offer letter. There is no credit check done for all offer letters. Your business must have a yearly revenue of $400,000 per year to qualify.
If you decide to move forward with the offer letter, you will be asked to send in the last 4 months of your bank statements, a recent tax return, and a few other easy to get documents. If everything is in order a credit line is set up and you will have access to your funds through our secure online customer portal whenever you need it.
Every business should have a business line of credit in place, just in case.