Improving Your Odds of Getting a Small Business Loan and Identifying Your Alternatives
For a bettor or a gambler, few things are as revered as a “sure thing.” That’s because few things are ever truly assured. OK, in horse racing, seeing Secretariat’s, Seattle Slew’s or Seabiscuit’s name in the lineup is never a bad sign. The same can be said for holding a royal flush in a high-stakes poker game. But how many times do these happen? In most endeavors success is never a sure thing, which is why so many people want to stack the odds as much in their favor as possible before taking a chance. And even then, there’s still the possibility of walking away empty handed.
A small business owner faces that dilemma each and every time they apply for a loan. Getting a small business loan is far from a sure thing. In fact, the odds are often greater of failure than success.
An estimated 30 percent of all business fail not because they had a bad idea or they lacked customers, but because they ran out of money to keep the operation afloat. So access to capital, be it to launch a small business or to grow it, is vital.
Small businesses can be capital hungry ventures. They borrow approximately $600 billion a year, a Small Business Administration study has found. About 40 percent of small business owners applied for a loan in 2017, according to the Federal Reserve. The average loan size was $633,000. However, more than half of borrowers applied for loans of $100,000 or less.
Banks and other traditional financial institutions typically reject far more small business loan applications than they approve. Alternative lenders are a slightly better bet with a little more than half approved. But even then, it’s not much more than a 50-50 proposition. Not the best of odds. Is there anything you can do before you apply for a loan to improve your chances? Can you swing the odds more in your favor? The answer is yes, and there are alternatives too.
Have a solid business plan: Lenders are not gamblers. They are risk averse. It’s simply their nature. Your job is to convince them you’re a sure thing. How? By having a complete, thorough and well-presented business plan, accompanied by a concise executive summary. Demonstrate your knowledge, foresight and planning skills. Show you’ve thought of every conceivable contingency as well as a way to overcome any potential issues. Let your passion shine through, but also display your sound judgment and fiduciary responsibility.
Have some skin in the game: Don’t walk into the lender’s offices expecting them to finance your business 100 percent. Even with the best business plan in hand, you still represent a risk. The lender is going to want to see you’re willing to share at least some of that bet with your own money. The more equity you have in the business when asking for a loan, the greater your odds of approval. Anything less than a 25 percent stake jeopardizes your chances of success.
Invest first in things that generate income: Lenders want to see a revenue stream that can be put back into the business to grow and expand towards continued success. What they don’t want to see are things that constantly take away from that revenue. One example is your business’s physical location. Do you plan to purchase or construct a building or rent space? If it’s the former, the bank will likely frown on that, considering those costs to be a drain on future revenues and your ability to repay the loan. Rent space in the beginning. You won’t be tied down and if trouble comes, you can easily downsize as needed. Plus, it will show the lender your first interest is generating income not expenses, something they want to see.
Shop around: As we’ve already seen, small business loan approval rates vary greatly among different types of lenders. Generally, the bigger the lender, the less likely you are to get a loan. Focus more on smaller institutions. Not only do they have a higher approval rate, they are more likely to give you greater attention and service. If you’re considering an alternative lender, such as an online loan provider, first check out our previous article on the potential pitfalls of going this route.
There’s another way to get same day funding: Engage a factoring company to fund you the amount of your outstanding accounts receivable invoices upfront, giving you the cash you need today to run your business today, and eliminating the worry and hassle of waiting to collect payments from your customer accounts. You’re left free to run your business. Invoice factoring is a convenient alternative to a traditional bank loan or fee-laden online loans.
Factoring gives you the money you need when you need it with no long-term obligations. You can also get cash quicker through invoice factoring – usually within a day or two. To learn more, simply call toll-free 1-855-219-6008 or email firstname.lastname@example.org.
Sr. Vice President of Operations at Charter Capital, a leading invoice factoring company for small to mid-sized businesses. Headquartered in Houston, Texas, Charter Capital provides accounts receivable financing and asset-based lending for major industries including freight and transportation, consulting firms, service providers, staffing firms, distributors and manufacturers, an oil and gas service companies.