Business Financing Blog - 2013
There are many reasons that businesses get turned down for business loans. Some business owners have bad credit. Some have poor or no cash flow. Some do not have needed collateral to secure the loan. And, for some, it has nothing to do with the business or borrower - as the lender might not be in a position to make the loan or refuses to lend to certain industries or against certain assets.
For as many declines that happen every year in this country, there are just as many reasons for the denial.
However, some of these issues are very easy to fix. If your credit is bad, fix it. If your cash flow is too low, improve it. Or, if the reason is outside your control, look to a different lender.
But, what do you do when you still cannot get a needed business loan?
We get a lot of inquiries daily about loan products for minority groups - based mostly on their gender, race or religion.
And, most of these requests relate to asking about specific business loan products based on those minority characteristics.
But, what you need to know is that there just are not any programs specifically for minorities - no matter what the ad may state or even what a lender may call their loan programs.
I know, Christmas just ended. But, your business has not ended (your business or your business idea) nor has your need for financing (business loans, commercial loans, or loans for working capital, equipment, real estate, inventory, etc).
To be completely honest, if you know that you will need financing in 2014 or even if you jut think that the next 52 plus weeks will offer some opportunities for your business to grow (and which you would need financing for) - know that you have to start planning and preparing now.
Getting A Business Loan In 2014
Depending on which financial organization you tend to frequent when seeking capital for your business, you will come across different lending terms - particularly terms like commercial loans or business loans.
But, what is the difference? Your bank many call their business lending products commercial loans while the bank next door may call theirs business loans. And, because they are called something different, does it mean that they are different?
Personally, we believe it has more to do with the way the organization wants to portray itself.
What a popular search term these days. After so much talk about government stimulus as well as late night infomercials about government grants, it is no wonder that so many people, many who are trying to start or grow a business, search for these government loan programs.
The problem is that no one can find them - even after so much talk about these programs.
Why? Because they do not exist - at least not the way we would all like them too.
Sure we have all heard about the $100 million loaned to this company and half a billion dollars loaned to that company by our government - but, know those loans are political in nature. They are designed to help save or promote certain industries or to create new markets. They are not designed to help you start or grow your business.
Yesterday, we posted a blog about how some non-profit, non-bank organizations are stepping in to fill the small business lending gap left behind by banks and other traditional financial institutions.
But, not only are these non-bank players underwriting loans that banks and their counterparts would not approve or fund but these organizations are doing so with cheaper loans (lower interest rates and fees) and are making money do it (something the banks say they can't do for business loans under $100,000).
This new competition is not only providing needed capital to small businesses (worthy small businesses - the backbone of our economy) but are in the process making those loans more affordable for these growing and hiring companies.
Over the years, especially the last few years since the financial meltdown, we have seen attempt after attempt to provide more funding to small businesses. The SBA worked very hard at modifying their lending programs to increase access to capital for small companies.
We have seen alternative lenders enter the market in hopes of providing very specific financing products to businesses in need - from asset based lending to the newer revenue based lending.
And, we have seen non-bank players (many that are community based or local government based) create business loan programs for their local communities.
All programs designed to get needed business capital into the hands of worthy businesses - businesses that will create new wealth, hire more people and essentially help in lifting up their individual communities.
Buying commercial real estate for your business is probably one of the biggest transactions that that you will ever undertake. But, it can also go a long way in helping your business obtain that next level - to get to that point (and only you know what that point is for your business).
However, being that these transactions are usually big transactions and that financing them can not only mean big loan amounts they can also mean making monthly payments on those loans for years and years and years to come.
Thus, to protect both the lender and the borrower, most commercial loan providers make the qualification on these loans extremely onerous.
Now, not getting into the standard qualification issues that all business loans require like credit and cash flow - the following are 3 key issues that you also have to keep in mind when seeking to finance commercial real estate:
We have start up businesses or companies run by young (meaning new to the business world and not so much their age) business owners that struggle to find needed capital.
This has really been a struggle that most businesses have gone through since the beginning of time.
But, it use to be - in our opinion - that these business owners would do anything that they could to get the money they needed to start or grow their companies.
However, it seems lately - over the last few years - that these new or small business owners are just not willing to take any step in raising the funds they need but instead only want a business loan - nothing else.
You go down to your local bank (or even fill out an online application) to request a business loan - a needed loan to start or grow your business.
The first thing that potential lender will do - every time - is pull your personal credit report. If your credit score does not meet their minimum threshold - they will decline your request and move on to the next loan application.
Sounds harsh but it is the way that business lending has been conducted for decades.
Lenders know that people who do not pay their past obligations as they agreed to do, will not pay future obligations - thus, they will take no chance (no risk) on anyone with poor credit.
Just read a strange story about business owners - both potential and current - going down to their local pawn shop to get a business loan.
Now, I know that I have said many times that money is just money meaning that it really does not matter where that money comes from - but what does matter is how you use those funds to grow your business.
For example, let's say that you have an opportunity to double your business. Currently your business earns some $100,000 per year and you have the chance to double that to $200,000 if you can lay your hands on say $30,000 to purchase what you need (like equipment).
But, you don't have the $30,000 on hand. So, you look to borrow that money. Now, you want your business loan to come with a rate of 8% or less. However, you can only get approved for one that has a rate of say 100% - meaning that you will have to pay back $60,000 - double what you borrow - all in a very short period.
Spent a lot of time this weekend on social media connecting with friends and family over the long Thanksgiving holiday.
However, mixed within these posts, I received several request for business loans. But, unlike the normal requests we get daily for business financing, these requests - every single one of them over this long weekend - all had something in common: They all wanted business loans under $20,000.
The problems with requesting these small loans are:
Today is the day! The day that only comes once a year for small businesses across this country - unfortunately one once a year.
It is Small Business Saturday - the first Saturday following Thanksgiving.
This, according to the SBA, is:
A day to celebrate and support small businesses and all they do for their communities.
So, you want a business loan to start or grow your company but are still not sure if you will qualify.
And, to be completely honest, the only real way to know for sure if you or your business does qualify for a commercial loan is to apply. If you don't apply, you will never know for sure.
But, having said that, most entrepreneurs like to be a little bit more educated about their chances before taking the plunge. So, to that note, we have scoured the web and found 5 of the best business loans tips (the best in our opinion) to help you decide if you should move forward in your loan search or if there are things that you have to improve on first:
For years, we have talked a lot about credit scores and how they can affect (severely affect) your ability to get a business loan.
Banks and other lenders - even government back lenders - as well as other financiers like angel capitalist or suppliers that provide trade credit will pull the credit reports of the business owner(s).
And, if those reports are bad (at least sub par meaning below their lending threshold) they will deny the credit request - no business loan for you or your company.
But, that does not meant that you and your business still cannot get the business capital you need to start or grow your company.
Over the last few years, there has been a big push to create an online sale tax requirement - requiring every business (at least those businesses that earn over a $1 million) to charge, collect and remit sales taxes from their online retail and service businesses.
The reason is not that it would be fair to all businesses (the grounds that brick and mortar retails are using to support the measure - even calling it the Marketplace Fairness Act) but more to cover funding gaps in state, city and local government coffers.
In fact, according to SBA's Office of the Advocacy, with their opening statement on this issue states:
"As the popularity of online shopping has grown, states have seen their sales tax revenues drop."
But, they go on to show that sales tax only accounts for 1.6% of states income.
Start up businesses have it the hardest in terms of funding their companies. No bank or financing firm wants to work with them until they prove their ability to generate revenue.
So, they get left in the lurch and have to find other ways to get the capital they need.
Most turn to personal resources like home equity loans, personal loans against personal property like stocks or other assets or loans from friends and family.
And, some may qualify for micro loans in their area - provided they have good credit and some form of other personal or household income.
But, beyond that - many start ups or small businesses just have to find their own ways to bootstrap their companies.
According to the latest SBA Office of the Advocacy report - more and more veterans are starting small businesses and most of these new veteran/entrepreneurs are younger - younger than 35 years of age.
In fact, there are roughly 2.5 million small businesses with veterans as the majority owner in this country. Of these, according to the SBA, some half a million are employer firms and all veteran owned businesses (9% of all small businesses) earn some $1.2 trillion in annual receipts.
Further, the majority of these small businesses were in the finance and insurance industries, at 13.2%. Yet, that trend seems to be changing as more of these younger veterans are starting businesses in the goods producing sector (something that will not only benefit them but our entire country as well).
Imaging not just "made in America" but "Made in America by Veterans!"
Starting a new small business can be a very daunting and challenging endeavor but it can also be extremely exciting and profitable.
Being your own boss can free you up from the so called 'rat race' adding freedom to your life as well as putting you in the drivers seat regarding your own wealth creation and financial future.
Making the decision to start your new business, while never easy, is usually the simplest step. The real challenges come in actually getting your 'doors open', running the business profitability and efficiently and growing your venture to the point that it will provide the returns of your dreams.
While each business has its own unique path to profitability, there are several common steps that all businesses must follow in order to start, run and grow their operations.
Over the last six years, we have seen one of the stingiest lending markets in regards to small or Main Street businesses.
Further, with the fact that our government has given billions in public money to lending institutions in hopes of stimulating small business lending, banks and other lenders are just not providing capital to small business owners.
Even with lower SBA guaranteed loans requirements and fees for both lenders and borrowers, needed growth and development capital is not flowing to business owners either looking to start or grow their business.
Banks state that they are willing to lend but are not seeing qualified borrowers. This means that credit scores and credit histories are below par (a bar that has been raised these last two years) and that business are not demonstrating an ability to repay these debt obligations (poor cash flow).
I get asked more than ten times a day how much capital a person needs for a new start-up venture.
This is a very hard question to answer as it depends on many, many things.
Even if the entrepreneur receives just a single number - there is no way to tell if this will be correct until after the fact - there are just too many variables.
While most budding entrepreneurs just want a single number, there are other ways to grow a new start-up no matter how much funding is available or that will eventually be needed.
Let's start with an example:
Two similar businesses (Business ABC and Business XYZ). Each earns $10,000 per month in profits. Both have an opportunity to purchase a second piece of equipment for $120,000 that would double the business's profits.
Business ABC - saves its monthly profits and plans to purchase the equipment in a year from now - assuming that the opportunity has not disappeared.
Business XYZ - leverages its current monthly profits, takes a loan and buys the equipment right now. The business uses its current earnings to qualify for the loan and plans to use the additional profits from the new equipment to repay the loan - called leverage.
While the state of the economy should never be a deterrent in starting a small business (regardless if the economy is up or down - people and businesses still need to consume goods and services); down economies do have some effect on the business owners ability to find and obtain capital for their ventures.
But, all is not lost if your personal credit is a bit lacking.
Most business owners usually have some types of capital to put into their business - be it from personal savings, retirement accounts or loans from friends and family. But, they usually do not have all the funds necessary to launch their business and tend to struggle with allocating the money they do have to the numerous start-up expenses they will encounter.
Plus, bad credit (or even no credit) will make it very difficult for business owners to obtain unsecured working capital for items like marketing, payroll, or even office supplies.