What you need to know
Starting and running a small business without having some form of credit is nearly impossible. Many small businesses do not make it simply because they’re under-capitalized. One month where sales and expenses budgets cannot be met could signal the end for business that could otherwise have succeeded. Others find themselves unable to grow their operations owing to insufficient access to the necessary funds. The answer may appear to be simple: get a loan and grow your business. However, getting a small business loan isn’t always easy.
Getting a bank loan
Since the recession, the FIDC has ensured that small businesses who apply for loans are subjected to very close scrutiny. The Dodd-Frank act of 2010 has effectively limited the possible sources of funding for small business. Many analysts feel that in doing so, economic recovery was slowed. Whether this is true or not, small businesses in need of additional capital often find themselves unable to secure conventional bank loans.
But is a conventional loan best for your business? The convoluted application process takes a great deal of time and effort and few loans are granted. In addition, repayment terms are highly inflexible. Small businesses are increasingly turning towards alternative lenders in order to get the business finance they need quickly, successfully and under less onerous repayment terms than banks allow.
The SBA 7A program
Getting the Small Business Administration to guarantee all or part of a bank loan might sound like a great idea in theory, but the program has been widely criticised for its limitations. Once again the application process is complex and lengthy and not all businesses can afford to wait up to three months to get finance approved – if it’s approved at all.
Then too, the SBA isn’t actually offering the finance itself. The small business entrepreneur still has to work through a conventional bank and banks remain reluctant to supply credit to small businesses. By 2011 a Gallup survey found that although 88% of businesses had access to credit, only 29% were lending from banks despite the SBA program.
What banks don’t take into account
The main problem with getting bank loans is that banks want to see guarantees that you’ll be able to pay back the money. That’s fair enough, but instead of looking at how good your business’ chances of success are, they look at financial history. That makes things difficult for newer business who don’t have the track record banks are looking for.
Remember, banks aren’t investors, they’re lenders. If the business or its owners don’t have the kind of credit history they’re looking for, they won’t issue the loan. Nowadays, financiers can use algorithms to project business income, but banks don’t use these tools when deciding whether you’ll get a loan.
Other financing options
Getting finance fast, especially startup business loans, can be crucial to the survival and growth of small businesses, especially startup business loans. Since the banking sector isn’t making things easy for them, small business owners are increasingly turning to alternative sources of finance that offer them faster turnaround time, rate their credit worthiness based on the business itself and offer plans with flexible repayment options.
Merchant cash advances
Businesses that handle a volume of over $5000 in monthly credit card transactions often choose the merchant cash advance as a source of funding that offers them easy repayments. A funding company advances cash to the lender at a pre-arranged fixed cost, allowing the lender to have a clear picture of the extent of the commitment in advance.
Repayments are calculated as a portion of credit card sales and are deducted automatically from the lender’s account. Thus, if the business is experiencing an unexpected quiet period, the repayment is lower without the lender falling into arrears with repayments. Obviously, this form of financing would not be available to a brand new business, but as little as three months of transaction history can secure your business this type of financing.
Business Cash Advance
This model is similar to the merchant cash advance, but repayment is handled through pre-determined daily deductions from the business bank account. Once again, the lender knows the exact cost of the credit in advance and need not make allowance for large monthly repayments that would impact heavily on cash flow.
One of the most difficult obstacles to overcome in obtaining a business loan is the requirement for collateral. By working through agencies, lenders can obtain an unsecured line of credit that does not require asset collaterals. A maximum credit limit is set, and the business is able to use as much or as little of the line of credit as it needs to at any given time. Interest is only levied on the amount of credit actually used. A minimum monthly repayment value is agreed in advance. This form of financing is particularly helpful to businesses that need credit to cover shorter term expenses.
Obtaining small business finance through a bank is still very difficult in the US. Many small businesses are turning to other sources of finance that offer them easy and quick access to funds based on their business health and future outlook rather than the personal credit worthiness of the business owner.
When investigating funding options, small business entrepreneurs would be well-advised to discuss various options with funding specialists in order to determine what kind of funding would be most suitable for their business rather than relying on the traditional bank loan.