Small Business Lending – Traditional Loans

Traditional Loans

The Small Business Lending Ecosystem is getting crowded and more confusing by the day. If you’re scratching your head wondering which is right for you? You’re not alone. To help you out, all this week we will be talking about the small business lending world, and the ways in which you can learn more about the system for your own success. To conclude our series on the SBL system, we’d like to share a story about Dr. Acosta and his attempts to go about getting loans the traditional way.

Your business is doing well. But what’s next? ProStrategix knows how to help. Read some of our other articles below, or feel free to connect with us and get a complimentary thirty-minute consulting session.

Dr. Acosta’s Story

Dr. Acosta ran a successful physical therapy practice. He serviced New York City, mainly in Manhattan. Dr. Acosta had been growing well. His rapid growth was causing some strain. He didn’t have enough PTs, equipment, and office space to take on any new clients. His growth was at risk of stalling if something wasn’t done.

A person seeking to get a traditional loan can still achieve that easily in 2019

What Did We Do for Dr. Acosta?

It was obvious for the start that Dr. Acosta needed to expand. Dr. Acosta’s business model was relatively simple. Dr. Acosta was in Orthopedics. His office and hospital clients provided a steady supply of post-visit/post-operative patients, who needed PT in order to regain or to improve their mobility and function. He knew and could forecast how much a PT an average client would need. Based on his current growth trends, it was easy to estimate how much additional capacity he would need. All we had to do was get it all down on paper in a formal that the loan underwriters and officers would understand and he would qualify. Dr. Acosta was a physician, not a banker so he wasn’t sure how best to proceed.

Small Business Ecosystem

So, which lenders were right for Dr. Acosta? How did we choose? Well, Dr. Acosta had an established business, which was profitable and growing. He had collateral in terms of his current and future equipment. He had a good credit score, enough to ensure his eligibility. 

Given these criteria, we decide to shop around the traditional bank and SBA route for the loan. Luckily, Dr. Acosta was aware of the expand before things became critical. This meant we had time to complete the SBA process. To ensure he obtained the best rates, we needed to do some comparison shopping. We chose to take to some local banks, his hospital credit union, and the lending platforms to see where we could find the best rates. His capital needs were high more $250K. Although they had the best rates, his hospital credit union couldn’t fund the full amount. A few of the lenders on the platform could fund the full amount, but the extra fees of using the platform negated the advance of their lower rates. Therefore, we decide to use a traditional large bank to secure the funding we needed, because alternative lenders could be too risky.

The Results of Traditional Lending

Dr. Acosta qualified and received the funding needed to expand. It took us a little over 3 months to close the deal, including our shopping time. We got the funding in time so that he was able to accept new patients before he hit capacity. Dr. Acosta was smart in not waiting until things became critical, which gave him the time needed to negotiate the best deal. He was able to get the lowest rate, which was roughly 4% over prime.

Small Business Lending — Starting with Loans

Starting with Loans

The Small Business Lending Ecosystem is getting crowded and more confusing by the day. If you’re scratching your head wondering which is right for you? You’re not alone. To help you out, all this week we will be talking about the small business lending world, and the ways in which you can learn more about the system for your own success. We’ve already told you about Tony’s attempt to expand his business and Tracy’s fight with poor credit. Today, we want to share the tale of Kayla, a business owner who owned a very new business and found herself starting to need loans in order to plan for growth in the future

Your business is doing well. But what’s next? ProStrategix knows how to help. Read some of our other articles below, or feel free to connect with us and get a complimentary thirty-minute consulting session.

Kayla's Story

Being able to get a small business loan when starting your company makes a huge difference

Kayla had started a new boutique marketing agency. Her agency had been around for about a year, and its growth had been phenomenal. Kayla focused on Facebook and influencer marketing. She’s a whiz when it comes to using these platforms, but not a financial genius. Kayla’s growth was almost too much for her to manage. She knew she needed to build scale, but didn’t know how best to do it. 

Kayla’s story is a familiar one. Given Kayla’s time in business, she faced a dilemma, should she go for equity financing or debt? The question we asked was how much control of the business did she want to maintain, and how much additional administrative expenses did she want to accrue in managing shareholders and/or partners?

This answer is different for everyone. For Kayla, she wanted to keep control. She wanted to be able to take on clients with whom she wanted to work. She didn’t want to be forced into taking any client in order to grow quickly, and that meant starting with loans early to stay strong. 

What Did Kayla Do?

It was obvious for the start that Kayla needed to expand. Kayla had her business model down. She was a genius at what she did, but she didn’t know how to hire, train, and replicated the taskings that she was doing. We went through our keep vs. toss exercise with her. Based on her current growth trends, and what we uncovered during our keep vs. toss exercise, it became clear as to which positions she needed to hire and how much capital that would take. We need to get it all down on paper and in a format that we could take to lenders. 

Small Business Ecosystem

So, which lenders were right for Kayla? How did we choose? Well, Kayla was a new business. She was profitable, but didn’t have much in the way of collateral. She was in business a little over a year. Thankfully, she had a good credit score, but her short tenure was problematic. 

Given Kayla’s situation, we needed to explore our options carefully. Kayla wasn’t a good fit for a large bank loan nor did she meet the SBA criteria. Therefore, we had to explore alternative lending sources to start getting loans. Kayla needed about $50,000 in non-secured working capital. We knew we had our work cut out for us. 

What we did have were some great, flashy, testimonials that Kayla had created. These told a great story. We were able to cut these into a pitch video, which was perfect for the peer-to-peer marketplace lenders. We could use this powerful video to pitch the business on these platforms in order to find several lends who could pool their resources to fund a loan. Kayla was growing quickly and that trend was highly likely to continue. Therefore, we could afford the higher interest rates that loans tend to have.

How Kayla Financed Her Growth, Starting with Loans

Using the peer-to-peer lending network, we were able to find 3 lenders, who were willing to contribute money to support the business. The rate, 15%, wasn’t great, but it wasn’t terrible either since she was growing at about 125%/year. We were able to hire the workers needed. Once we had the new team in place, Kayla continued to grow. So, when she was ready for the next phase of expansion a year later, she was the ideal candidate for an SBA loan. 

We used that loan both to refinance her old debt and to use as working capital for her next growth phase.

At ProStrategix, we know you have concerns.  We’re designed to help give you the business support you need so you can focus on doing what you love.  If you would like to learn about how we might be able to help you, please contact us.

Bank Fear Gets in the Way of Loan Approvals

If approval rates are at record highs, why are businesses still struggling to be approved for small business loans? It’s usually for two reasons. First, there is a significant amount of fear of banks. It’s not surprising. Bank speak can be intimidating. The second reason is less than stellar credit history. These two problems can combine to create small business growth issues. 

Today, we will look like a second example of of how ProStrategix helped people get loans. Unlike yesterday’s protagonist, Phil, today we will look at Amy and how she dealt with her light fear of dealing with bankers. Recent interest rate decline means that now is great time for loan approval rates, especially if you can qualify for a good one. And that’s how we got involved with Amy. 

Unsure of how to take your business from good to great? ProStrategix knows how to help. Read some of our other articles below, or feel free to connect with us and get a complimentary thirty-minute consulting session.

Amy's Story

Having fears of banks can damage your wallet in the long run

Amy operates a small, but highly profitable salon. Amy built her business for a twochair beauty salon with 4 stylists, and now she oversees a 5chair salon with even more stylists. In those 4 years, Amy’s business has nearly tripled. She had built a very successful formula and brand at this location and had outgrown her space. When we met, she was considering expansionBut, she wasn’t 100% sure exactly how best to go about that kind of growth.

Amy was cautious with her spendingbeing careful with getting capital. While she was an amazing businesswoman with phenomenal intuitive business skills, she didn’t have any formal business training. So, “banking stuff” took her out of her comfort zone. 

Numbers and bankerspeak was intimidating to her. She is a bright woman. She just did have the formal training so it’s only natural to feel a bit out of place when bankers are speaking in jargon you don’t understand. All professionals speak in code. It’s not intentional. It’s just how they were taught. After using it so much, they forget that it’s not the way most people speak. Even when confronted and confused by other professional jargon, they fail to recognize it. A doctor is likely as confused by banker speak as a banker is by doctor speak. 

How We Helped Amy Conquer Her Bank Fear

Amy was in ideal candidate for an SBA loan

Unlike many of her peers, her training wasn’t as costly so we student loan debt wasn’t crushing. In fact, she had nearly all of it paid off. Her personal debt was low, and she had excellent credit. In addition, she has a successful track record. These are just the type of businesses the SBA program was designed to help. 

hacks for business loan

We went straight to the smaller banks

With a loan debt load and excellent credit score, we knew the smaller banks would be more than happy to help her get over her fear of banks. We just needed to get her application and business plan in order so we could streamline the process and get her the capital she needed relatively quickly. The SBA loan process is slow, so the better prepared you are, the faster it will go. Plus, her capital needs were modest <$100K to open another studio.

Loan approval can be influenced by fears of banking

Amy was approved on her first try. The SBA backed ½ of the loan, which meant the Amy only had to guarantee ½ of the cost of the loan, which is a much lower burden on the businesses. We applied in June, and she had funds in August, which is almost record time. Amy’s bank fear has all but disappeared ever since.

At ProStrategix, we know you have concerns.  We’re designed to help give you the business support you need so you can focus on doing what you love.  If you would like to learn about how we might be able to help you, please contact us.

Loan Approvals Are at Record Highs. Don’t Let Credit History Hurt

If approval rates are at record highs, why are businesses still struggling to be approved for small business loans? It’s usually for two reasons. First, there is a significant amount of bank-phobia. It’s not surprising. Bank speak can be intimidating. The second reason is less than stellar credit history. 

Across the next two days, we will look at two examples of people we at ProStrategix helped to get loans. It is something quintessential to succeed in the long term. Today we will look at the story of Phil, who had made some decisions earlier in his business that left him with poor credit. The good news is that in smaller bank or alternative lenders, the trend is much better. In fact, approval rates are over 50%.

Unsure of how to take your business from good to great? ProStrategix knows how to help. Read some of our other articles below, or feel free to connect with us and get a complimentary thirty-minute consulting session.

Phil's Story

Phil operates a small, but growing catering company. His niche was in providing untraditional services (food choice, attire, etc.) for Millennials and Gen Z’ers. Phil was able to provide less transitional graduations and weddings to his audience. Phil’s own youth is part of the reason for his success. While that’s helped him with his small business, it’s hurt him a bit too. Phil is a people person, who has a lot of friends and likes to hangout with them. It’s part of how he gets business, but it’s expensive in NYC. Plus, like his peers, he was heavily burdened by student load debt. He need money to expand, but banks weren’t willing to work with him. Understandably, he felt stuck and frustrated.

How We Helped Phil's Credit History

Personal Debt is Painful in More Ways than One

Phil’s case is all too common, especially for people in their 20s and 30s. Student loan debt is crushing. In fact, the average student owes nearly $40,000. While these rates are typically low, they are a millstone, even if you never miss a payment. Most business owners don’t realize that their personal debt level impacts their access to business capital.

We Skipped the Big Banks

With this debt load and his good, but not excellent (750+) credit score, big banks couldn’t help him. It’s not worth the time or hard inquiry on his credit report. We worked with an alternative lender, who specializes in cases like Phil’s. Phil has a strong payment history. Phil was in business for more than 2 years. Phil only need a modest amount (<$100 K). Luckily, a bit more than half of the applicants are approved. Typically, SBA loans are the loans of choice. They reduce the risk for both the lender and the borrower. 

“The U.S. Small Business Administration (SBA) is the largest economic development agency in the world,” says SBA New York District Director, Beth Goldberg. “With an annual credit line of more than $30 billion allocated by Congress, SBA guaranteed loans help bridge the gap between small businesses that lenders might turn away and those who are able to start or grow companies with financing.”

A Clear Plan Won the Day

It was perfectly smooth sailing, but with a solid plan with proven business model, we were able to get Phil approved. Small business owners often look at business plans as a formality. In this case, it really made a difference. Like I said, Phil is a non-traditional guy. He was able to show that in his application. His plan captured the essence of his brand beautifully. Without it, I don’t believe the bank would have understand his unique benefit and its appeal to his target.

At ProStrategix, we know you have concerns.  We’re designed to help give you the business support you need so you can focus on doing what you love.  If you would like to learn about how we might be able to help you, please contact us.

How A.I. is Transforming Business Lending

AI and Lending

The rise of Artificial Intelligence has completely shifted all forms of business practices. Specifically, A.I. is transforming small business lending in ways both positive and negative. On the positive side, it helps detect fraud, increases the speed of underwriting, and levels the playing field somewhat. On the negative side, A.I. loan monitoring can be both a blessing and a curse. So, it is wise to be aware of what these changes mean to your small business.

Your business is doing well. But what’s next? ProStrategix knows how to help. Read some of our other articles below, or feel free to connect with us and get a complimentary thirty-minute consulting session.

Funding is One of the Biggest Pain Points for Small Businesses

As we’ve said in multiple posts, small to medium size businesses employ nearly ½ of the nation’s workforce, but the sector is often overlooked. Whether it’s healthcare, retirement, or taxes, small businesses rarely have the advantages that big businesses do.

Funding is no exception. Small to medium-sized businesses often struggle with traditional lenders. Traditional lenders make the most money on big loans. Microloans and SBA loans are not their main focus. While SBA loans are hands-down the best option for small to medium-sized businesses, the application process is slow and cumbersome. We’ve discussed these challenges before, but digital lending may help alleviate some of these challenges.

Fraud Detection

Machine learning allows for better fraud monitoring

When it comes to small business lending, underwriters are always concerned about fraud. A.I. has vastly improved the fraud detection process with algorithms based on credit-bureau data, ID verification systems, and numerous other data sources. These algorithms provide a predictive probability of fraud, which can immediately flag risky applications. Thereby, it speeds the process along.

Somewhat Leveler Playing Field

The traditional lending process is laden with bias. Both gender and racial biases are well-documented. A.I. has the potential to lessen these biases, but its track record so far is a bit mixed.

That said, the A.I. models do use a significantly larger data set to help paint a more detailed picture of creditworthiness. This does helps avoid the Paydex paradox. In other words, you need a load to gain sufficient credit history, but how can you do that if you’ve never had one. It’s the “insufficient credit history” trap. While A.I. doesn’t eliminate all bias, it does help to level the playing field somewhat.

Hands-Down, A.I. has Dramatically Improved Efficiency

The best time to ask for capital is when you don’t need it, but few small businesses have that luxury. Historically, the review process for larger loans can take weeks at best, months at worst. Not to mention, the time it takes to collect and provide all the necessary documents and follow-up questions. Even if you didn’t need the capital at first, you could be in more dire straits by the time the process ends.

A.I. has made programs more efficient

The best time to ask for capital is when you don’t need it, but few small businesses have that luxury. Historically, the review process for larger loans can take weeks at best, months at worst. Not to mention, the time it takes to collect and provide all the necessary documents and follow-up questions. Even if you didn’t need the capital at first, you could be in more dire straits by the time the process ends.

A.I. solves this issue with its predictive models. These models dramatically streamline the underwriting process. The model can quickly provide eligibility parameters in hours vs. weeks. Thereby, it makes the process simpler for everyone.

Improved Loan Monitoring Through A.I.

This helps the banks, but not necessarily the small business borrower. However, this is the price we pay for the benefits above. Since lenders now have access to all this data, tracking your business is much easier. Those same A.I. models that were trained to improve fraud detection, level the playing somewhat, and speed things along, also were trained to predict default.

This is where a dose of caution is worthwhile. While improved loan monitoring does make small business lending less risky and more profitable for the bank, it does make it a bit more risky for the borrower. Lenders are a conservative lot. Therefore, given any mixed data, they are likely to interpret it more negatively. So, while you may think the business is fine, the A.I. model may not. It could be much harder in the future to secure a small business loan.

On the whole, the changes to small business lending due to A.I. are mostly positive, but with any new tool, it helps to understand how it can be used for you and against you.

At ProStrategix, we know you have concerns.  We’re designed to help give you the business support you need so you can focus on doing what you love.  If you would like to learn about how we might be able to help you, please contact us.

How to Avoid a Common Small Business Mistake

Common Small Business Mistakes

After years of helping clients, we’ve found that the most common small business mistake is poor cash flow management. Cash flow is one of the key financial documents you should monitor and keep up to date. Your accountant can help you. QuickBooks or other software can do it for you. If both make your head spin, we can help you too.

Your business is doing well. But what’s next? ProStrategix knows how to help. Read some of our other articles below, or feel free to connect with us and get a complimentary thirty-minute consulting session.

Why We All Should Care about Small Business Success

Every business has ups and downs when it comes to cash coming in. Customers pay late. Things get delayed. Projects start late. The problem is we all have monthly costs, such as rent, payroll, etc. going out regardless of how much is coming in. That’s what results in people living paycheck to paycheck, or being forced to be overly thrifty with their money. Cash flow management is developing a strategy that creates a buffer so you always have enough to weather these fluctuations.

“[The most common small business mistake] owners make is that they don’t understand their cash forecast, and business can be going very well, but you can run out of money,”

— Karen Mills, the former administrator of the U.S. Small Business Administration (SBA) during President Barack Obama’s presidency in Yahoo Finance

In 2017, small businesses created 1.7 million new jobs. That number rose to 1.9 million in 2018, and another 1.9 million in 2019. There are nearly 31 million small businesses in the US, which employs about ½ of the US workforce. When cash flow falls apart and you face this mistake, your small business is more likely to fall behind. Karen Mills hit the nail on the head when she said that small businesses “…create a path to the American dream, so it’s not only part of the economy, but it’s part of economic mobility.”

How to Manage Cash Flow to Avoid this Common Mistake in your Small Business

Here are four easy tips to learn how to easily combat this mistake in your small business.

1. Know You Average Billing Cycle

What’s a billing cycle? It’s the average time between the date you send an invoice and the date the cash is available in your bank. Available is important because it can take a band 1-2 business days to clear a check. During that time, that cash is NOT available for you to use. Typical billing cycles are between 40-70 days. Cash flow is important for most aspects of business management

2. Keep Enough Cash on Hand

In an ideal world, you would have enough cash on hand to cover your expenses over your average billing cycle. In plain English, you should have enough money in the bank to cover 2 to 3 months of expenses. Now, no one lives in an ideal world, so what can you do?

3. Have a Backup Plan

For many, this takes the form of a line of credit. A line of credit is when a bank agrees to loan you money up to a fixed amount. The interest rate is usually variable, meaning it is set based on the Federal Reserve rate plus some fixed percentage. You would treat this as a regular loan, with TWO major advantages.  First, you take only the amount you need. Second, you can pay it off early

 

Lack of cash on hand always causes problems

First, you take only the amount you need. Second, you can pay it off early without penalties. Most term loans are lump-sum payments. They also tend to carry early payment penalties. This is why lines of credit are much more preferable to loans when dealing with short-term cash flow problems.

4. What to Do if You Can’t Get a Line of Credit

Lines of credit are hard to get. You need stellar personal credit. Plus, you need to be in business for at least 2 if not 3 years. We’ve gone into depth about the challenges you face getting loans and how to avoid them. So if you can’t get a line of credit, your best bet is to get a term loan. It’s not ideal, but it’s better than running out of cash. However, if you don’t qualify for a line of credit, you’re not likely to qualify for a term loan.

We review the alternatives in our post “Denied a Small Business Loan? Try Alternative Lenders”. But always remember, the time to ask for a loan is when you have money in the bank. Don’t wait until you have a cash flow emergency to do it, and NEVER take a merchant cash advance. You’ll only make your problems worse.

In summary…

…to avoid the most common small business mistake, always keep your cash flow forecast up to date. We know that’s more easily said than done, and that it pulls you away from doing what you love. Fortunately, you can turn to us for help.

At ProStrategix, we know you have concerns.  We’re designed to help give you the business support you need so you can focus on doing what you love.  If you would like to learn about how we might be able to help you, please contact us.

Denied a Small Business Loan? Try Alternative Lenders

Denied Small Business Loan

If you were denied a small business loan, it may be for a good reason. As we discussed in some of our previous posts including ‘Small Business Lending is Booming’; ‘4 Tips to Secure a Small Business Loan’; and more, it’s not always advisable to seek a small business loan if there are other things that need to be fixed first. So let’s figure out what those things are, shall we?

Unsure of how to take your business from good to great? ProStrategix knows how to help. Read some of our other articles below, or feel free to connect with us and get a complimentary thirty-minute consulting session.

So, You Were Denied for a Small Business Loan. Now, what?

Not getting a small business loan isn’t the end of the world. However, there are times when you need a loan or alternative funding to fix certain problems. What should you do then? Well, there are a number of alternative lenders available to you. If you need to take this path to secure a small business loan or funding, you should take it with your eyes wide open. In other words, this is considered the high-risk lending market. High-risk equals higher rates, and generally, short-terms.

You’re Not Alone

killing-your-growth

Banks are conservative. So, if you’ve been denied a small business loan, the lender considered you too risky. Being viewed as too risky doesn’t automatically mean that your business is in trouble, or you’re radioactive. This isn’t necessarily the time to despair.

“Nearly 20% of small businesses report being denied credit”

– Kauffman Foundation

And those that get approval, don’t always get the amount they want.

“More than ½ of small businesses that applied for a loan under $250K in 2018 receive less than requested”

– Federal Reserve

We have covered the reasons for denial in detail in previous posts, so there’s no need to rehash those here. But that shouldn’t keep you from trying to grow your business in other ways.

Denied for a Small Business Loan: The Alternative Lender Options

Even if your small business has been denied a loan, you may still have a good chance of obtaining funding form alternative lending sources without pain. These non-bank, online lending services offer alternative sources of funding with less strict requirements.

32% of applicants have turned to online lending in 2018, up from 24% in 2017

– Federal Reserve

The National Small Business Association has said that these lenders have played a significant role in providing capital to small businesses.

Less Strict

While traditional lenders require good credit scores, collateral, and business plans, alternative lenders are less like to deny a small business loan if these factors do not meet the traditional banking standards. They accept average credit and are less likely to need to see your financial statements. In fact, “54% of business with credit scores less than 700 are more likely to apply to an alternative lender”, according to the Federal Reserve.

Nothing is Ever Free

While getting approved may be easier, the rates will almost certainly be higher. Plus, there are also additional fees attached. There is no simple way around it. It’s not necessarily bad, but you need to be aware of the impact that will have on the business. To put this into perspective, SBA loans or

Commercial loans have annual percentage rates (APRs) between 6% to 12% on average. In contrast, alternative lenders tend to range between 7% to over 100% depending on the risk profile. Did you say 100%? Yes.

While alternative lenders can be a lifesaver after being denied for a small business loan, just make sure it doesn’t turn into an anchor that sinks your business. Like any business decision, you have to weigh the cost vs. the benefit and go in with your eyes open. Dangerous financing early in business could cause massive problems down the line.

Crowdfunding & Peer to Peer Lending Can Offer an Out

Crowdfunding and Peer to Peer can offer an alternative if you are denied a small business loan. They often offer lower rates than online lenders because the risk is distributed across a wider group. Crowdfunding & Peer to Peer lending is generally best for smaller, micro-loans. Why? You will need to do the heavy lifting. You need to build the campaign. Recruit people in your network to donate funds. Ensure you reach your target. The larger that number is, the harder that will be to achieve.

Alternative Lenders List

Note, we do not endorse or recommend any of the lenders on this list. We are sharing these for informational purposes only. We recommend you research any option thoroughly before taking any action.

    1. Lending Club
    2. Credible
    3. Lending Tree
    4. Eloan
    5. PayPal Loans
    6. AmOne
    7. UpGrade
    8. Lending Point

Crowdfunding & Peer to Peer

Note, we do not endorse or recommend any of the lenders on this list. We are sharing these for informational purposes only. We recommend you research any option thoroughly before taking any action.

    1. Prosper
    2. Kiva
    3. GoFundMe
    4. Kickstarter
    5. Fundly
    6. FaceBook
    7. UpStart
    8. Funding Circle
    9. CircleBack
    10. Peerform

In summary, if you’ve been denied a small business loan, first, understand why. If you can solve that problem first, then do it. If not, then it depends on how much you need, and how much time and effort you can spend. Alternative lenders can be viable options, but you need to know what you are getting into before you take the leap. We help troubled businesses all the time, so if you want professional help in choosing what’s best for you, please contact us.

At ProStrategix, we know you have concerns.  We’re designed to help give you the business support you need so you can focus on doing what you love.  If you would like to learn about how we might be able to help you, please contact us.

Get Capital Without Getting Clobbered

Get-Capital-without-Getting-Clobbered

As we said in our post, “Small Business Lending is Booming”, the market is awash with capital. Just because you can get capital, doesn’t mean you should. It can be risky, and some loans are more dangerous than you might think So, how can you get capital without getting clobbered?  

In fact, Kabbage just got $200M in funding to support its AI-based small business loans. When the market is saturated with capital, lenders start making riskier loans. Riskier loans mean higher interest rates, for example. Follow our three simple steps to know how to say afloat. 

Unsure of how to take your business from good to great? ProStrategix knows how to help. Read some of our other articles below, or feel free to connect with us and get a FREE thirty-minute consulting session. 

First, can you grow faster than the interest rate being charged?

How do you know? Simple, what’s does your business plan project? Don’t have one? Write one.

Right now, small business lenders might be more willing to allow less thorough plans or none at all. You might think that’s a good thing, but it’s not. Remember, if you can’t grow faster than the interest rate, you’re losing money. Defaulting on easy capital is just as damaging as defaulting on hard. In other words, that’s the first way you can get capital and get clobbered.

A business plan requires a business model. Your business model can tell you whether or not you have a good chance to grow at the rate you need to grow in order to beat the interest rate. With one, you’re much more likely to be able to get the right capital without getting clobbered.

Second, how is your credit?

It’s unlikely that you will qualify for a low-interest rate with a small business lender if your personal credit score is less than 700. We’ve heard of lenders now willing to give capital to people with scores as low as 600.

While it may sound like it’s a great thing to give people a chance, unfortunately, it’s not.  They’re not going to give you the capital for free. A lower score will mean higher levels of interest. 

This takes us back to our first point. You can get clobbered if you get
capital at a rate which is higher than you can grow. If you can, you would be
better served to fix your personal credit before you seek capital.

Having a high credit score is the second thing that can help you get capital
without getting clobbered.

Lastly, What’s your debt cash ratio (DCR)?

Your what? This is basically a fancy term which looks at how large of a loan you can reasonably afford based on your size.

See our post “Small Business Lending is Booming” for the formulas to do the calculations. If you fail those fitness tests, then perhaps you should explore other options.

Being overleveraged is the final way you can get capital and get clobbered. It limits your options later if there is a downturn or a slowing of your growth. Since you’ll still have to pay back the debt, you’ll have less cash on hand for everything else.

You can really get clobbered if you gave any personal
guarantees to get that capital. Why? Because now your personal possessions are
at risk. If you’ve been
in business less than 2 years and/or you lack collateral to offset the debt,
you may be forced into this position.

Being
properly leveraged is the final way to get capital without getting clobbered.

If all of this has made your head spin, you’re not alone. Unfortunately, this is really important to understand. The last place anyone wants to be is swimming in debt from a small business lender. 

At ProStrategix, we know you have concerns.  We’re designed to help give you the business support you need so you can focus on doing what you love.  If you would like to learn about how we might be able to help you, please contact us.

Why You Should NEVER Use Merchant Cash Advances

NEVER-use-Merchant-Cash-Advances

A merchant cash advance is a form of financing that should be avoided like the plague. Over the years, we’ve seen a number of struggling businesses fall victim to these predatory lenders. Don’t be one of them.

Feeling like your business isn’t going the right way? ProStrategix knows how to help. Read some of our other articles below, or feel free to connect with us and get a complimentary thirty-minute consulting session.

Merchant Cash Advances are NOT loans

When they reach out to you and position their products, they sound like loans. They look like loans. But, these are NOT loans.

In the aftermath of the financial crisis, banks were cutting back on lending just when small businesses needed cash the most. Companies such as Yellowstone stepped in. They got around lending regulations by calling what they did “merchant cash advances,” not loans

Bloomberg

Even judges will admit there is very little distinction between the two, but unfortunately, there are very big differences in the consequences.

They know all the selling tricks in the books

They hire anyone who can sell, and scruples of those agents are highly questionable.

The best brokers earned tens of thousands of dollars a month, former employees say; others slept at the office, fought, sold loose cigarettes, and stole from each other.

Bloomberg

The most notorious tactic is the bait & switch. It typically starts with an unsolicited fax or e-mail offering a large loan at a low rate. Once you respond, they generally say that in order to qualify for the bigger loan, you have to accept a smaller amount and make a few payments as a trial. Then, the hammer falls.  For example, Bloomberg reports on one poor couple.

The advance turned out to be for $36,762, repaid in $800 daily debits from their bank account starting the day after they got the money. This would continue for about three months until they’d repaid $59,960. But when he followed up the next month to inquire about the status of the bigger loan, he got no response.

Bloomberg

Merchant Cash Advances can have APR (annual percentage rates) of up to 400%

Say what? Yes, that’s true. It’s usury at its worst. Because they are merchant cash advances, the percentage rate in the forms they send you are NOT the APRs. For example, one of our clients reached out to us after getting themselves into trouble with Yellowstone Capital.  According to Bloomberg, they are one of the worst.

In that agreement, Yellowstone stated a “specified percentage” of 25%. It sure looks like an interest rate, right? Wrong. It’s definitely not. In the agreement, they state the amount given and then, the amount owed. Thus, they’re betting on you not knowing how to do the math, and mistakenly assuming the specified percentage is the interest rate.

For instance, this client was paying $19,000 in interest in 6 mos. on a $40,000 advance. In no universe, does that equal 25% APR. In other words, if you do the math, the APR was around 120%. Another client came to us, after getting into trouble with a loan with an APR of 67%.

In the Bloomberg example for instance, the APR for that loan was 350%. In comparison, our clients got off easy although it nearly bankrupted them.

Merchant Cash Advance lenders can ruin you

The most damaging way they can affect you is through an obscure law called confessions of judgments.  To obtain funds from these merchant cash advance lenders, you usually sign a clause agreeing to a confession of judgments. What is it? It’s a way to collect a debt without the fuss of a trial. How do they work? Bloomberg has a great graphic.

NEVER use Merchant Cash Advances
Merchant Cash Advance Confession Judgment Process

Within a few days, your bank accounts can be drained. Liens will be put on any of your accounts receivables. Liens can also be put on your personal assets if you signed any personal guarantees for the advance. While not enforceable in all states, it is a well-used tactic in New York State, where these laws are enforceable. Because of this, most of these lenders are based in New York. And, if you read the contract in detail, you will undoubtedly find that the contract states that it will be governed by the laws of New York State. 

As the chart shows, the use of this tactic has skyrocketed since 2014

Never Use a Merchant Cash Advance

Why isn’t anything being done to stop merchant cash advances?

There is action in Congress, but the government process is slow. Plus, it faces an uncertain future in the Trump administration.

Velazquez, chairwoman of the committee [House Small Business Committee], and Roger Marshall, a Republican from Kansas, have introduced a bill that would ban confessions of judgment in business loans. Ohio Democrat Sherrod Brown and Florida Republican Marco Rubio have made a similar proposal in the Senate.

Washington Post

What’s the moral of this sad story?

Get help before your financial situation makes you desperate. Merchant cash advance lenders prey on the hopes of small business owners who are having financial difficulty. We have written several posts that can help us find the right financing for you: How to Take the Pain Out of Getting a Loan”, “Securing a Loan: Top Tips for Small Business”, “Small Business Lending is Booming”, “Best Small Business Loans & How to Qualify for Them”, and “How to Avoid Looking Stupid When Talking to Banks”.

As Shane Heskin put it beautifully in the Washington Post article, small business owners aren’t bankers and lawyers.

“My clients are very good at what they do. They know how to fix a boat. They know how to install a sink,” said Shane Heskin, a lawyer at White & Williams LLP in Philadelphia who represents small-business borrowers. “But that doesn’t mean they know how to read a contract in 8-point font. It doesn’t mean they know the legal ramifications of signing a confession of judgment.”

There are plenty of sources for help.  We cover them in our post “How to Learn about Business for Free,” and we can help you with much more than just that.

At ProStrategix, we know you have concerns.  We’re designed to help give you the business support you need so you can focus on doing what you love.  If you would like to learn about how we might be able to help you, please contact us.

Best Small Business Loans & How to Qualify for Them

Best-Small-Business-Loans

Getting the best small business loan for your business is often critical to a business’ success. The question is, which are the best for you, and how do you qualify for them?

Getting a small business loan can be critical to the economic growth of a company, but financing remains elusive for more than a quarter of small U.S. firms

National Small Business Association

Your business is doing well. But what’s next? ProStrategix knows how to help. Read some of our other articles below, or feel free to connect with us and get a complimentary thirty-minute consulting session.

Business Loans Best for Small Business

The best type for your small business depends on the age of your business, your profitability & trends, and how you plan to use the money. We cover a lot of these topics in our blog post “How to Avoid Looking Stupid When Talking to Banks”. So, we won’t go into as much detail here.

Lines of Credit – Best Loan for Small Business Working Capital

In simple terms, a line of credit is very much like a credit card. A bank agrees to lend you up to a certain amount, at a certain interest rate. You do not get a lump sum of cash, and only pay interest on the outstanding balance. Aside from a slightly lower interest rate, it operates almost identically to a business credit card.

Loans – Best Loan for Small Business Capital Purchases

There are two common types of loans. First, the traditional term loan is when you borrow a fixed amount and pay it off over a fixed period, at a fixed interest rate. These are generally used for purchases of large ticket items, like equipment, for instance. Second, the short-term loan is when you need to borrow a relatively small amount of money to cover a short-term need.

For example, a seasonal business that needs to purchase goods prior to the start of their busy period. The difference between the two is the term loan term is in years, while the short-term is in months. For term loans, the SBA loan is the go-to choice. We speak to this at length in our post “How to Avoid Looking Stupid When Talking to Banks

Invoice financing

These are very similar to short-term loans, but in this case, there is some bill (invoice), which is used as collateral. For example, a service business who has to pay its service providers before they are paid by their clients. Alternatively, a manufacturer who has to pay for the production of its goods before the retailer pays them. If you have a business that is functioning optimally, you should be able to cover these gaps on your own. They should be used sparingly. Their overuse can signal a struggling business.

Merchant cash advances

For completeness, I am putting them here. But, they should be avoided at all costs. They are akin to payday loans. They offer predatory rates for quick cash. These exist, but I do not recommend them. 

Where to get the Best Small Business Loans

Generally, the best place to get a small business loan is a bank or banking service provider like a Lending Tree, for instance.  Credit unions are another great source for loans, but they tend to be more risk-averse. They do offer more competitive rates, so they are worth exploring. Finally, there are alternative loan providers. 

Alternative loan providers are generally peer-to-peer or direct lenders. They generally operate online.  Their applications are easier, eligibility requirements are more forgiving, and you get the money fast.  However, you pay for this flexibility and speed with higher interest rates. They usually come with some personal guarantee, so some of your personal assets may be at risk.

How to Qualify for the Best Small Business Loan

We’ve covered this topic in a number of posts: “How to Take the Pain Out of Getting a Loan”, “How to Avoid Looking Stupid When Talking to Banks”, “Small Business Lending is Booming”.  So, we won’t go into all the details here.

Know how much you need and where you’ll spend it. Be Realistic.

No one is going to write you a blank check. In “How to Avoid Looking Stupid When Talking to Banks”, we go into this topic in detail.

Clean-up your personal credit

If you have a credit score lower than 700, your options are limited. We discuss this in detail in “3 Key Hacks to Getting a Small Business Loan”, “How to Avoid Looking Stupid When Talking to Banks”, “Small Business Lending is Booming”.

Have a solid business plan

This supports the first point. We explain how to do that in “4 Simple Steps to Write a Successful Business Plan” and “5 Steps to Take When Analyzing Your Business”. The business plan is how you sell your idea to the lender. Plus, it’s how you support your use of funds.

Be informed & look for the right match

Making sure you are asking for the right product from the right lender is key. We discuss this in “How to Avoid Looking Stupid When Talking to Banks”.

In summary, to find the best small business loans, and to ensure that you can qualify for them, you need to do your homework. Following the steps provided should make things easier. Also, there are great free and paid services that can help you through this process as it is time-consuming and cumbersome.

At ProStrategix, we know you have concerns.  We’re designed to help give you the business support you need so you can focus on doing what you love.  If you would like to learn about how we might be able to help you, please contact us.