Business Financing Blog
Most of the time, when people discuss alternative business loans, they talk about private, non-bank companies that provide, essentially, asset based business loans - asset based being both physical assets like equipment, commercial property and inventory as well as financial assets like accounts receivables, purchase orders and bank accounts.
The problem with this definition is that it is not just non-bank companies that provide alternative business loans.
The commercial real estate market is heating up - finally.
Just a few years ago, many pundits thought that the commercial real estate market was the next catalyst in our economy that would bring another financial crisis in this century (the third).
The reasons for this, like the housing marketing, is that there was a ton of subpar commercial loans being held by banks, financial institutions and investors - combined with economic conditions that were making it very likely that the vast majority of those borrowers would be unable to continue to service their debt as well as lower property values that was, financially, holding these loans and property in an upside down position (meaning that the outstanding debt was higher than the value of the collateral).
Business loans - for whatever business need like working capital, equipment, real estate purchase or even buying an existing business - are hard to get.
And, because of this, many business owners like to turn to Small Business Administration (SBA) loans - which are perceived to be easier to get - especially for new or small companies.
However, the SBA, while not a direct lender, does have their own requirements and criteria that your business must meet before they guarantee your loan request - which can make or not make these loans more attractive.
So, how do you determine when a SBA loan is right for you?
There are many reasons to buy investment property with the most important being the financial rewards that can come from doing so - like having ongoing rental revenue to supplement your current income and selling that property down the road for a large lump sum profit.
But, getting a commercial business loan to buy that property is not so easy - in fact it is down right hard to do these days.
Unless you know what you are doing!
This question gets asked thousands of times a day; "Where can I get a business loan?"
And, while the answer is not an easy one because your ability to get a loan approved and funded depends on a lot of things like your wherewithal, your need and what you plan to use those funds for.
But, there are general answers to this general question.
Where To Start Your Business Loan Search
Restaurant businesses are probably one of the hardest businesses to start and grow in any economy. But, they can also be very profitable as well (just look at all the well known chefs around the world opening hundreds to thousands of new restaurants each year not to mention the new eating places that open in your town or city each month).
So, how do you finance your business given that you constantly need new capital to ensure that your company stays a vibrant fixture in your community?
Accessing credit has been a big issue for businesses of all size. Banks' tighten credit standards resulted in not only fewer new business loan approvals over the last few years but also resulted in those already having credit in place seeing their active debt facilities get both pulled back or canceled outright.
However, at the beginning of every year we hear how lending standards are improving and that the credit markets are posed for a turn around. Yet, as we move through the year, those predictions just do not seem to pan out - leaving more and more businesses (especially small businesses) without the capital they need to start or grow.
But, now we are seeing some real changes happening - not just talk.
The best start up business loan in today's market for small businesses is not getting a business loan at all. What? That doesn't make sense. Or, does it?
A recent study done by the SBA's Office of the Advocacy found that one-third of all businesses (new and existing) have not or are not using business loans to financing their companies.
In researching how start up businesses (those under 500 employees) and high tech firms finance their companies, this study found that, "about one-third of new nonemployer firms and 12 percent of employer firms use no startup capital at all."
The SBA's Office of the Advocacy just released some new findings on where small businesses are getting the capital they need to start or grow.
For Start Up Businesses
Startups depend about equally on the owners' cash injections and bank credit, and the most common sources of startup dollars are owners' and relatives' savings.
Which makes a lot of sense given that banks and other traditional financing companies have been avoiding start up businesses for decades. They want to fund positive track records with lots of cash flow and collateral - items that start ups tend to not have.
We get asked daily where someone can find a business loan. Which is a great question.
But, it is also a generic question that is very hard to answer without more information.
All lenders are different - even between banks or between alternative lenders and so on.
How Much Are You Seeking?
Business loans are hard to get - especially if your business is still in that start up phase.
Banks and similar conventional business lenders just do not like to approve and fund business loans anymore. They either claim they cannot make money from them (loans under $100,000) or that they cannot find creditworthy borrowers.
However, 86% of all businesses still go to their banks when seeking needed business capital and for the most part, those 86% get turned down.
So, where can a business get the loan it needs?
Sometimes you only need a little money to start or grow your business. At least half of the people that contact us each day are only looking for business loans in amounts of $10,000 or less and in many cases less than $5,000.
While in the grand scheme of things, these loan amounts are not huge and should be relatively easy to obtain, very few business lenders will consider a loan this small let alone approve one.
Banks and similar financial institutions claim that they cannot make any money on loans under $100,000. Even alternative business lenders usually will not touch a loan under $30,000 with most having a minimum of $50,000.
It is widely believed that Valentine's Day is based the martyrdom of a Roman priest named Valentinus who was sentenced to death and executed for either performing marriages for Roman soldiers (which was outlawed) or for ministering to Christians or both - probably both.
After his execution and some bold stories about his otherworldly abilities (like the power to heal) he was later made a saint. Thus, he became Saint Valentinus posthumously.
It is also believed that before his execution, he sent a letter to a young woman whom he helped heal in which he signed "Your Valentine" in closing. Thus, became the beginning of what we now consider the basis for Valentine's day.
However, our modern lore surrounding this day has more to do with an English writer - Geoffrey Chaucer - who declared this day a day of love given the sexual revolution that was happening in 18th century Europe at the time.
I saw an online ad the other day that touted a business loan for people with bad credit. Now, I know that these types of loans really don't exist and thus, when I usually see these types of ads, I tend to ignore them.
But, I have been seeing more and more of these advertisements over the last few months and my curiosity got the better of me. So, I decided to do a little research.
Here is some of what I found:
Financing business equipment has to be - in our opinion - one of the easiest forms of business financing; the easiest business loan you can get.
First, the equipment or asset being financed can be (will be) used to secure the loan. This means that if your lender requires some form of collateral - which they all do - then you already have that requirement covered.
Credit matters - it always has. Poor credit usually shows a lender that you, as a borrower, will not pay as agreed if the going gets tough - at least that is the theory. And, if you have proved in the past that you will not pay as you said you would, then lenders just will not give you any additional credit. Simple enough.
However, many business owners complain that their personal credit scores should not come into play when applying for business or commercial loans.
Yet, time after time, banks and other business lenders pull personal credit scores to make their decisions - I know I do.
New year; new hopes and dreams about starting a business or growing your business so that you too can work hard to build your own wealth and secure your own financial freedom - not to mention all the benefits your business provides to your local community.
But, many times (most times) getting a business loan to help with your business dreams is the one single item that can derail those dreams.
So, the question becomes; why are business loans - especially for small businesses - so hard to get?
So, you have decided that you need a business loan to start or grow your company. It does take money to make more money after all and that is why you are or want to be in business - to make money.
You might even know what lender you want to use - most likely the same bank that you keep your personal or business accounts at - which is always a good place to start (you might not get a loan or the loan you want - but, still an OK place to start as you already have a relationship there).
Now, the question becomes: Are you qualified for a business loan - any loan for that matter?
Can't get a business loan from your bank? Well, there are alternatives.
Last year, there was a report put out that non-bank lenders provided some $3 billion (with a B) in alternative loans to small businesses in 2013.
That's quite a large sum given that banks and other traditional lenders are pulling out of the small business lending market - a decline of some 15% since 2007.
On the surface, it is nice to see that these non-bank, short-term lenders are stepping up and filling this funding gap for small companies - companies that also need capital to grow, build wealth and hire.
Most grants these days are not set up and administered as we would like. We just can't go there and ask for money and get it (and not have to pay it back).
Further, many of us would like to get free money to start a business or to help us move our companies to that next level. But, just cannot find those programs even though we are told they are out there.
Even government grants are not just a flow of free capital into businesses like yours or mine.
Yesterday, Reuters put out an article about new optimism regarding small business lending.
The article started with;
"Loans to businesses have risen to a record high and bank executives say they are increasingly optimistic about the U.S. economy."
Went on to say;
"Outstanding loans to companies reached an all-time high of $1.61 trillion at the end of last year, topping a record set in late 2008, according to Federal Reserve data released on Friday."
Most business loans today are secured by something. It could be commercial real estate. It could be business equipment. It could be other business assets or it can be by personal assets.
But, the bottom line is that nearly every business loan today is secured by some form of assets.
Now, it makes a lot of sense when your business uses a loan to by equipment or real estate, that that loan will be secured by the assets being acquired. This protects the lender and if you can lower their risk you can essentially lower the cost of that loan as well as have an easier time getting that request approved.
But, what happens when your business doesn't have or isn't seeking a loan to purchase business assets?
Many times, growing businesses struggle with their cash management. Far easier to spend money than it is to earn and ultimately collect that revenue in the first place.
And, it can be too easy to close a potential deal with a customers when you can allow that customer to delay their payment for those goods or services for days, weeks or even months.
But, to run a solid business operation, your company has to have working capital on hand. And, if it doesn't, it either needs to work on its cash management practices - like getting paid sooner or by extending its payables (cash going out) longer to match those receivables (cash coming in) - or it has to find a way to finance its capital needs during those short-term, waiting to get paid periods.
Everyone wants a business loan to either start or grow their companies. Yet, they also want that loan to be as cheap as possible. I don't blame them.
But, many also get a sense of sticker shock when they actually apply. It is hard enough as it is to get approved these days with tightened lending polices only to find out how much a business loan can end up costing your business if approved.
Business Loan Cost
The three (3) standard - most common costs - your business will face are:
So, you have determined that you need a business loan to ether start or grow your company.
You start looking around for business lenders and determine that you want to start your search with your current bank - you have a relationship with them given all the deposits you run through them not to mention all the fees you pay each year.
But, you are unsure what your bank lending officer will require.
What You Need To Apply For A Bank Loan
Came across a very interesting fact regarding home based businesses. Did you know that 52% of the 22.5 million small businesses in the U.S. are operated out of the business owner's home?
And, if you think about it, it makes a lot of sense given that starting a business and running it out of your home offers a lot of costs benefits - with the most important one being reduced overhead costs - cost not directly related to generating revenue and creating profits.
You have to live somewhere whether you are running a business or not. So, home expenses are typically costs that you have to cover anyway. Then, when operating a business and needing space to do it, why not bring it into your home if you can? No additional mortgages, no additional lease costs and no additional maintenance costs like utilities, taxes and repairs.
Business lines of credit or commercial lines as they are commonly called are probably the most sought after business financing vehicle on the planet and as such are probably the hardest to get approved.
Types of Commercial Lines
There are essentially three types of commercial lines of credit.