By Tim Roach
Banks may advertise that they’re willing, able and interested in helping small businesses access the funds they need to grow and support their operations, but a recent analysis indicates that small business lending remains quite weak among banks (and has since the 2008 financial crisis).
Here’s a look at some of the critical factors the small business loan application process with banks entail, and how they can impact a small business’s ability to secure financing.
The paperwork is daunting.
Despite how tech-savvy a bank may claim to be, many small business loan applicants must invest a significant amount of time providing the documentation required as part of the small business loan application process. For example, many banks require that business loan applicants provide:
- Proof of the business’s current financial standing, including account statements for all banking and credit relationships
- Proof of past financial performance for several years (most banks require that small business loan applicants have at least two years of operating history)
- Proof of assets and debt obligations
- Copies of filed business tax returns for several years
- Business plans, growth projections and similar support of future expected performance
Once the paperwork is compiled and submitted, there’s no guarantee that the time you invested in its preparation will result in financing. In fact, banks approve fewer than 25 percent of small business loan applications.
Lender relationships impact loan decisions.
Small business lending exposes banks to risk. If your business closes its doors, has a tough season or files bankruptcy, and you stop making payments on the loan, the bank must absorb any balance (assuming the loan isn’t associated with the Small Business Administration (SBA)).
As a result, the small business loan application process is often influenced by relationships your business has with your bank. The more accounts you have with the bank, and the longer you’ve maintained them, the more likely the bank will consider your small business loan application.
Your small business loan isn’t that profitable for banks.
It’s wise to borrow only what you need to ensure your business is financially able to manage loan payments, but the loan application, underwriting and approval processes for small business loans require that banks make the same operational investments as they do for larger loans commercial clients may seek. As a result, it’s in the bank’s best interest to invest their resources into lending relationships that present the most potential profit. In fact, many banks specify a minimum loan amount applicants should want to borrow before the application process even begins.
Your personal finances impact business loan decisions.
Your personal credit history could be an important factor banks consider when determining whether they’ll loan your business money, and for what interest rates and terms. The experts at Forbes recommend that, at minimum, a small business loan applicant have a credit score of at least 700, and your personal debt obligations should not be more than 33 percent of your income. If your personal credit history isn’t positive and/or your business doesn’t have an established and positive credit history of its own, you may have a hard time being approved for a bank business loan.
Bank loans may offer competitive interest rates and terms for small businesses that qualify for them, but they have stringent approval criteria — and often, minimum loan requirements. Startups and mom-and-pop shops in particular may not be the best fit for financing. Explore the requirements of any bank loan before you apply to make sure that the time you invest in pursuit of the funds is well spent.
Tim Roach is the co-founder of Lendr, a company that offers merchant cash advances for small and medium-sized businesses. Roach holds a B.S. in Finance from Linfield College, and previously served in the United States Navy. Before joining Lendr, Roach founded Oak Street Trading, a proprietary trading firm, in 2002. @LendrOnline.