Imagine this: you’re a small business owner who needs to purchase inventory, relocate, or acquire a new piece of equipment in order to take on a opportunity. So the first thing you do in your search for a business loan, is hop in your car and drive to the nearest bank or credit union. Pretty obvious right?
You begin by talking to someone, probably in the small business loan department. Things seems like they’re going well, but let’s face the facts: Unless you’re an all-star applicant, your chances of being approved for a loan are very slim. In fact, as of August 2013, banks were approving only about 17% of their loan applications. Let’s just say, these are people that have sparkling credit scores, tons of collateral, and all the time in the world to wait for approval and funding. But, being the dedicated small business owner that you are, you put your trust in the banking system, and tell yourself, “this is what a bank is supposed to do, fund my business!” In other words, you decide to apply.
The loan application process
So it begins, the bank of your choice begins the application process. During this time, you’ll be asked several questions about your business’ experience, business credit history, the education of the borrower, and other questions about the history of your business. Soon after the lengthy personal questions are answered, you’ll be analyzed and critiqued in order to determine your ability to pay back the loan you’ve just requested. Lenders will also decide if you are creditworthy.
Almost done right? Think again. The next part of the application process requires you to prove that you have collateral to put forward. This reduces the risk to the lender, but increases the burden of the loan to the applicant. Most borrowers are required to put forth real estate, inventory, account receivables, and other securities as collateral.
Next, bankers look at capital. This means a company’s net worth and equity. These are two key determining factors when it comes to becoming approved for a loan by the bank. But get this, according to sbinformation.about.com, some lenders state “If we see a business owner that is unwilling to invest in their own company first, they often will not receive funds from the bank.” So better make sure you financial statements show that you’ve drained your all your personal accounts in order to make your business thrive.
After all the lender’s questions have been answered, if you are dealing with a traditional bank, your application will be submitted to a committee, who will review your information. You’ll wait 30-60 days before you know whether or not you’ve receive the loan or not (Forbes.com, 2013).
The Phone Call
The time has finally come, you’ve been waiting eagerly, & preparing for the worst-case scenario. The bank calls you to tell you the news. At this point, you’ve been waiting so long that you’re probably already frustrated! Even if the banker were to deliver good news to you. However, according to the statistics stated earlier in the article, only about 17% of people will hang up the phone with a smile on their face. The other 83% of applicants will be faced with the challenge of finding funding for their business elsewhere.
An Alternative Direction
If you decide that your business is having no luck with the banks, you’ll likely decide to look for business funding elsewhere. Enter: the alternative lender. Alternative lenders are considered by some business owners, as Superman. Their magic-like powers can fund your business in as little as 48 hours, requiring no collateral, and an imperfect credit score. Moreover, if you decide that you would like additional funding after you’ve paid down 50% of your loan, you’ll be able to receive it easily.
Alternative funding options are not only for people with bad credit, or those who don’t have any collateral instead, they are for the other 87% of small businesses, for one reason or another, didn’t receive funding from the bank.