Since the 2008 financial crisis, small business owners have been severely hampered in securing bank loans. Decreasing sales, weakened collateral and risk aversion all created a perfect storm in the world of lending. More than five years later, the storm isn’t over. Despite the perseverance of small businesses during the recovery time, banks remain more risk averse now more than ever. While the demand for loans is increasing, banks are still recovering and showing reluctance in issuing these loans. And that’s not all; banks face substantial regulatory hurdles in determining and issuing loans to small businesses.
Despite the perseverance of small businesses during the recovery time, banks remain more risk averse now more than ever.
The lagging cyclical factors and structural barriers that prevent lending have made it questionable as to whether or not banks will ever fully return to the small business market. It’s time to accept that this bank lending environment may be “the new normal” for small businesses. While this may be frustrating to many business owners, it may be worthwhile to avoid the process altogether. Before visiting a bank for a loan, make sure you are aware of the process, and if necessary, apply the time and resources that you have in a different direction. Below are five things that banks won’t tell you about the small business loan application process.
- Business owners spend an average of 33 hours applying for a loan. Do you have at least 30 hours of time to devote to paperwork? Not many business owners do! Thankfully, new technology is making the process of lending faster and easier. Small business owners can now go online and quickly get approved for loans with rates that are competitive with (and sometimes even cheaper than) traditional banks.
- Your chances of getting a small business loan is 1 in 10. Following the crisis, regulations were put in place to prohibit banks from lending as much as they did before the crisis. This has especially impacted the small business market. Because of these regulations, banks have to evaluate applicants on a risk scale and consider every possible issue they could face with a borrower. If you are deemed a risky asset, it is likely that you will not be approved.
- Your personal credit score matters. If your credit score is below 700, you will most likely face complications. With the regulatory hurdles put in place following the crisis, it is now increasingly difficult for banks to consider an application with a credit score of less than 700. You stand a much better chance of acquiring a small business loan if you work on improving your credit score. Start by paying down your personal debt and credit cards so that the bank, and any other lenders, have more faith in your abilities to payback their loan.
- If you’re looking for more than $10K, you will likely need collateral. Collateral gives the lender peace of mind in case you are unable to return payment. The upside to this is that your chances of receiving a loan increases dramatically if you are able to produce collateral. The downside to this is that you may have to put your personal property at risk to secure a loan.
- It will probably take a few weeks to find out if you are approved. Traditional bank lending still entails walking into a bank in a nice suit, completing applications and paperwork with pen and paper, and waiting in line. However, this is just the beginning. With their internal regulatory limitations and the levels of which they need to seek approval for issuing loans, the turnaround time from when you arrive at the bank to when you find out if you are approved can take a few weeks. If you are approved, up to 6 months is required to actually receive the loan.
However, the news about lending is not all bad. Luckily, there are other ways in which small business owners can find alternative sources of funding if they want to borrow money. In response to the lending limitations of traditional banks, small business owners are borrowing money from alternative lenders, such as online platforms like Lendr, crowdfunding sites or online marketplaces. According to an article from CNBC, “the size of the nonbank financial system is estimated to be at $3.2 trillion and will continue to grow, especially for smaller businesses.” Small business owners are on the same page, and they are starting to think differently about their funding sources.
In response to the lending limitations of traditional banks, small business owners are borrowing money from alternative lenders, such as online platforms like Lendr, crowdfunding sites or online marketplaces.
While knowing where to get small business financing is important, knowing when to start the process is a big decision. Some business owners choose to apply for funding as soon as they launch their business so that they could avoid expenses until their business becomes profitable. Other businesses will shy away from funding altogether. Most businesses try to grow as much as possible before requesting financial assistance, and then once they do, they request the smallest amount required to help them achieve their goals. This is a very common practice and has helped many small businesses thrive.
Most businesses try to grow as much as possible before requesting financial assistance, and then once they do, they request the smallest amount required to help them achieve their goals.
If you plan on seeking financing for your small business, start by creating a plan of how you will spend those funds and a timeline of how you will pay them back. By being proactive (and staying realistic) you will avoid any potential outcome of being buried in debt. Taking a conservative and thorough approach will not only help you avoid future failures, but it will also increase your chances of transforming borrowed money into business success!