Over the past several years, it has been much easier for businesses to get an instant business line of credit or a business loan. Unfortunately, those days are over. A company will now experience much more scrutiny, making it harder to be approved. Read below, and in a few minutes, you will know what a bank will be looking for to approve your loan request.
Does your business need a loan or line of credit?
The first thing you should know is that term business loans are used for long-term business investment, while a line of credit is for short term cash flow issues due to uneven cash flow.
Secondly, the simple rule of thumb about applying for any business loan is your ability to pay it back. If you can show how you will pay the loan back, then it probably is a good decision to apply. If you think you are unsure if you can pay it back, then my advice is to work on your business more and don’t waste your time applying.
Get your business in order by continuing to work on your business model. However, if you have a growing company and you need a loan to keep growing or to handle your accounts receivable, then those our reasonable considerations.
Banks are going to raise their standards
Banks have always required businesses to have collateral, a 680+ personal credit score, and a profitable business. What will get tighter due to the recession are the ratios that banks will look at regarding debt to revenue, accounts receivable turnover, clients you are working with, your industry, and many other business measurements.
A bank’s loan approval process is so complicated that it is almost impossible to anticipate what they will be looking at to approve you. Just know that without 100% collateral and an excellent credit score, you are not going to get approved. Banks don’t invest in a company because you have a good idea.
The approval process nowadays will be significantly stricter and longer due to the recession.
Alternative lenders are out of cash to loan for businesses
Since the 2008 recession, there have been new avenues for small businesses to turn to for capital. Well known, larger alternative lenders have been the go-to source for small companies. But, that has dried up. The largest alternative lenders were all funded by banks. Now that the economy is in a deep recession, alternative lenders have a lot of their funding to loan money out.
The smaller alternative lenders (like my company) do not use bank funding but uses private funds. Therefore, the smaller alternative lenders will continue to approve lines of credit to good businesses with revenue over $400,000 per year.
The advantage of an alternative lender is that many do not require collateral or personal guarantees (called an unsecured loan) for business loans or credit lines. Also, the credit required is often much lower. Lastly, the key benefit is the time it takes to get an answer, which is hours/days versus months at a commercial bank.
A business loan from a bank is typically less expensive than an alternative lender, but not always. In the case of a line of credit, it will depend on how much you will use the credit line and how quickly you will be paying it back.
The PPP, Disaster Relief, Main Street government program is over
By the time you read this article, government loans and grants will have ended. Or, if not, even if you do apply now, you will be in the back of the line.
If you are thinking of applying for a regular SBA loan, be prepared that SBA loans go through approved banks. This means that there are additional steps that require a lot of patience and time. I certainly believe that if you think you qualify for an SBA loan that you should fill out the paperwork because SBA loans are beneficial, but it is going to take a long time to get an answer.
What you can do to get approved with a bank
First, make sure your company is profitable and that your business is stable. Your next step is for you to make sure you have either business or personal collateral to back up the loan.
If you have the collateral, then check on your credit score to make sure it is at least a 680. I use Credit Karma, which gives me a free credit report and keeps me updated monthly on my credit changes. You can also get all three credit reports for free weekly through AnnualCreditReport.com.
If you can wait for a few months for approval and have all of the above, then try applying with a few banks or learn about the qualifications for an SBA loan. Also, it’s not a bad idea to apply with an alternative lender while you apply to a bank. It will not hurt your chances of being approved with the bank, and you will have financing in place until you get an answer from the bank.
Stephen Halasnik is Managing Partner of Financing Solutions, which provides instant business lines of credit. Our Line of Credit product costs nothing until used and is inexpensive when needed making it an excellent cash backup plan. @fundmypayroll