Business loans: Formerly the realm of credit cards, crossed fingers and bank collapses, thankfully it's once again possible to get credit from lenders other than ones called "MasterCard" or "My neighbor Bill who's been pretty good about saving his change in an old cookie jar shaped like his favorite childhood clown." The recession is winding down, banks are opening up, and businesses are growing again. Maybe now is the time to get a little extra capital to fund your own plans for expansion.
If you're not experienced getting them, however, securing a loan for your business can be a little daunting. Where do I go? Who do I ask? How can I make sure they say "yes"?
Ty Kiisel, director of content marketing for Lendio, a small business lending service, answers all those questions and more.
Print+Promo (P+P): What are three good things small-business owners should do to improve their chances of getting a loan, and why?
Ty Kiisel (TK): This is an easier question to ask than to answer, but I'll give it a shot:
1. Start by looking inward.
Most lenders (particularly banks) are going to look at your credit rating, your annual revenues, and any collateral you might have. Particularly for small-business owners, your personal credit rating, along with your business rating, are important. If that's what they're going to be looking at, it's what you should be looking at too. Although there are lenders who look at other criteria, you're credit score is No. 1. The lower your score, the more expensive (read: the higher the interest rate) the loan will be.
2. What am I going to use the extra money for?
Banks are pretty risk averse and don't like lending to small-business owners who can't demonstrate they have a plan and a projected outcome regarding how the funds will be used and how they will positively impact the business. A plan is more likely to get the small-business loan than no plan. So I guess the question should really be, "Am I able to effectively share the plan with a lender so they get as jazzed about what I'm going to do with the money as I am?"
3. Can I demonstrate a plan for the timely repayment of the loan?
This is really tough for idea-stage companies with no income—and is why so few of them are able to walk into the bank and get a loan. I'd go so far as to say, if you haven't got a plan for how you will repay the loan, you probably shouldn't take a loan if offered. Nothing could be worse than accepting financial responsibilities you don't have the means to accommodate. Hope-ium doesn't count here either. Acquiring a small-business loan should not be an exercise in wishful thinking.
P+P: What's something small businesses often misunderstand about getting a loan, and why does this misunderstanding create issues?
TK: For younger businesses, it's probably that your passion, work ethic, and the strength of the idea just aren't enough for the banker. With the exception of possibly an angel or venture capitalist (and they have their own methods for evaluating investments) lenders aren't really interested in financing someone's dreams. They want to lend to viable entities with an ability to repay the loan.
The other misconception is that the only place to get a small-business loan is at the local bank. There are hundreds of community banks and alternative (read: non-bank) lenders who specialize in helping small-business owners. Just because you might not get a loan at the bank (only 10 percent do), there are options, and small-business lenders anxious and willing to lend to most small-business owners. The only caveat here is that idea-stage companies or owners with bad credit have much fewer, if any, viable options. Most lenders want to see a couple years under your belt combined with sustainable revenues before they'll offer anyone a loan.
P+P: What's the best thing a small-business owner can do to make sure they get approved for a loan?
TK: The single most important thing is a strong credit score. There are loan types that also look at the number and amount of your credit card transactions or accounts receivable (read: collateral). But short of a good credit score and collateral, a strong business plan and projections regarding what you intend to do with the funds and how they will positively impact your business are important to some lenders.
P+P: Can you briefly describe how your company helps small businesses find and receive small-business loans?
TK: Lendio uses technology to match small-business lenders to small-business owners. This is a free service to small-business owners who answer a few questions about their businesses and get matched to lenders interested in working with small-business owners that meet a certain profile. There are banks, credit unions and alternative lenders on the system, so most of the time, borrowers get matched to lenders who potentially would offer them a loan. Tens of thousands of small business borrowers visit Lendio.com every month.
P+P: Is there anything you'd like to add about small-business lending?
TK: The smallest small businesses, the main-street type businesses most of us identify with as small businesses, probably have the most difficulty finding the financing they need to fund working capital or fuel growth. Unfortunately, 70 percent of the new jobs created every year in the U.S. come from those businesses and roughly half of the workforce is employed there. The way we define small businesses lumps the small dry cleaner that does my shirts in the same bucket (small business) as the $30 million software company. The SBA, government regulations, and the risky nature of Main Street businesses, don't encourage banks and other traditional lenders to work in that space. The industry in general (including the SBA) needs to redefine what makes up a Main Street business and make it easier for traditional banks to invest in the space. Inexpensive capital to fuel job growth with the nation's primary job creator is a problem that doesn't have a real good solution yet.
At Lendio, we're trying to do our part help business owners learn about their current options.
For more information on Lendio, visit www.lendio.com. For more borrowing advice from Kiisel, search for "Ty Kiisel" on Forbes.com or visit www.lendio.com/blog.