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.

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.

How to Avoid Looking Stupid When Talking to Banks

Avoid-Looking-Stupid-Talking-to-Banks

Luckily, there are few hacks you can use to avoid looking stupid when talking to banks. 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. 

Bank-speak can be extremely confusing for borrowers, even small-business owners who run complex operations.  Some banks may hide behind claims of legal liability, or perhaps they’ve forgotten how unfamiliar these terms are to someone outside the industry.  Either way, banks’ over-reliance on credit jargon is a false precision that can cost them valuable business.

Forbes Magazine

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.

First hack on how to avoid looking stupid when talking to banks

Know how much you need. Be clear about when you need it. Finally, know how you will use it.

You can avoid a dizzying array of bank products by simply knowing the answers to these three questions.  Why?  Because, certain classes of loans have minimum thresholds, while others require lengthy application processes.  All come with stipulations on how the funds can be used.

Let’s use a small business administration backed loan, more commonly known as an SBA loan, as an example.  For instance, an SBA loan is the holy grail of small business loans because it provides the most favorable terms to small business.  For example, you will likely have the lowest monthly payments with an SBA loan because it offers the lowest interest rates and longest payback periods, usually 7-10 years.  Most commercial loans max out at 4 years.

Let’s use our 3 questions hack to avoid looking stupid when talking to a bank about an SBA loan.

First, how much do you need?

SBA loans come in 4 flavors.  Each has a different borrowing level threshold. 

    1. Microloans: $10K up to $50K.  The average is around $15K
    2. Community advantage: $50K up to $250K
    3. 7(a): $50K up to $5M
    4. 504: up to $5.5M

Second, how will you use it?

Each of these loans has stipulations for how the funds can be used.   Microloans and 7(a) loans are the most flexible.  They can be used for paying bills (working capital) or purchases (non-working capital). 

Community advantage loans are like 7(a) loans, but can only be used by small businesses in underserved markets. 

504 loans are for real estate and equipment purchases.

Lastly, when do you need it?

The SBA application is slow and cumbersome.  If you need the money quickly, this is NOT the route to go.

A real-life example of how to avoid looking stupid when talking to banks 

I’m a small business owner who doesn’t want to look stupid when I talk to my bank.  I’m profitable and have been in business for 3 years.  I’m looking to open a new location, and I need money to do it.  It will take me six months to be ready to open my new location.  So, what should I do?

First, how much do I need? 

I make out a budget of all the things that I need: furniture, equipment, computers, people, etc.  When I add it all up, it comes to $65,000.  Perfect.

Next, how will I use it? 

Well, I just made a list of everything to estimate the amount, so that step is already done.  Check.  I just need to ask if I’m in an underserved market.  In this case, I’m not.

Finally, when do I need it? 

Six months from now so I have time.

Great, now what would I ask so I can avoid looking stupid when talking to my bank?  With this information, I can go and ask for a 7(a) and explain why I’m a good fit.

Second hack on how to avoid looking stupid when talking to banks

Is my business ready for a loan?  In our post “Small Business Lending is Booming: Are You Ready”, we go into this topic in detail.  But, for this post, we’ll keep it simple.  I apologize in advance, but this is not the easy part.

    1. How long have you been in business?
    2. What’s your personal credit score?
    3. Are you a US citizen, and over 21?
    4. How much debt do you already have?
    5. Do you pass the basic loan fitness tests?

You may be saying, “you call that simple”?  Trust me., we can get more technical, but these 5 questions are enough to avoid looking stupid when talking to banks.

First, how long have you been in business? 

If you’ve been in business for less than 2 years, you will not qualify for an SBA loan and will have to use one of the bank’s products.  They are likely to have higher rates and shorter payback periods, e.g. higher monthly payments.

Second, what’s your personal credit score?

If you are below 650, you will not qualify for an SBA loan.  In fact, if you are below 700, you will face an uphill battle.  You probably shouldn’t even bother visiting a bank.  You will likely have to look to non-traditional lenders, which equals higher interest and monthly payments.  Be very wary if you find yourself in this position.

Next, are the citizenship and age questions. 

If you are not 21 and a US citizen, you will not qualify for an SBA loan.  Few lenders will loan to people under 21 for the simple reason that there hasn’t been enough time for a solid credit score, and the business hasn’t been established.  Unfortunately, you cannot apply for an SBA loan if you are not a US citizen.  So, it’s good to be prepared to have all your documentation before speaking with a bank.

Finally, questions 4 and 5 are related.

When applying for a loan, they will almost certainly ask for a debt schedule.  So you don’t look stupid when talking to a bank, a debt schedule is a fancy term for a list of all your debt. For instance, the loans, credit card balances, etc. that are outstanding.  Next, how much do you owe on each, and when will they be paid off.  

They will also ask for a P&L or income statement.  This is a standard financial document your accountant can provide.  Don’t worry about looking stupid when talking to a bank, it’s just a table of how much you made, less how much you spent.  We offer some free tools that can help.

Finally, you will need to pass some fitness tests.  We won’t cover the tests here, but you can find them in our post “Small Business Lending is Booming: Are You Ready”.

Ok, that’s a lot.

Let’s use the example from the first hack

First, I’ve been in business for 3 years.

Check.  Great, but we didn’t know our score.  So, we would have to use a free credit report checking service, Credit Karma, Experian, etc. to know what it is.  Make sure you look for your FICO score.  They are free and will not hurt your score to check. 

Second, Credit Score

In this example, I will use Experian and find my score is 700.  Ok, not bad, but now I know that I’m going to face some challenges.  So, I’m going to need to pass my fitness tests will flying colors.

Third, Age & Citizenship

I’m an adult, US citizen, and over 21. So, check. Check. 

Finally, Debt & Financial Fitness

My credit score check will tell me how much personal debt I’m carrying.   Next, I’d ask my accountant to provide my balance sheet.  He or she will know what that is. 

Again, don’t worry about looking stupid when talking to the bank, a balance sheet is just a table listing all your assets (what you have) and balancing them vs. your liabilities (what you owe) and your equity (how much is left: assets – liabilities).  You would use this data to run your fitness test.  For this example, let’s say I just make it.

It is a lot. But, importantly, we’ve learned enough to avoid looking stupid when talking to our bank.

We now know that we have a selling job to do.  Our credit and fitness tests pass, but just barely.  If we are going to get this loan, we will have to convince the banker on the power of our business plan.

Final hack on how to avoid looking stupid when talking to banks

Have your business plan and business model ready before you go to the bank.  We’ve covered both topics in detail in our posts: “4 Simple Steps to Write a Successful Business Plan” and “4 Steps to Take When Analyzing Your Business”.  We won’t rehash that here.

It requires a lot of homework if you want to avoid looking stupid when talking to banks

However, if you do the homework, you will save yourself a lot of time and stress.  The good news is that you don’t have to do this alone.  There are both free and paid services that you can use to help.  SCORE can be a very useful free service if you want someone to check your work or coach you.  ProStrategix, a paid service, offers a more hands-on, concierge service, which can do most of the homework for you.

In summary, it’s important to do your homework so you avoid looking stupid when talking to banks. Whether you choose to go it alone, get some coaching, or have someone do it for you is a personal choice depending on how much time and money that you have available.

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.

Small Business Lending is Booming – Are you Ready?

small-business-lending-is-booming

“The small business lending market is booming, and it’s not the traditional banks that are benefiting.”, Donna Fuscaldo from Fintech wrote in her article “PayPal’s Latest Milestone: $10 Billion In Small Business Loans” published in Forbes this month.  It’s not just PayPal® that’s booming: Stripe®, YapStone®, Braintree®, Adyen®, Lending Club®, and Kabbage® are all jumping in.

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.

Are you ready for this small business lending boom?

Remember the housing boom and financial crash of 2008?  It’s not that bad, but it is buyer beware. These are great companies, but with all this competition, these small business lenders may be willing to provide loans to business who really aren’t ready for them.

How do you know if you are ready for the small business lending boom?

Before seeking a loan, it is important to know how you will use that loan to get a greater return (grow faster) than the interest rate being charged.  This is where a little planning upfront can save you a lot of pain later.  Luckily, there are a couple of easy tools you can use to lessen your risk and to gauge how ready you are to capitalize on this small business lending boom.

First, Do You Have a Business Plan?

Right now, in a booming small business lending market, lenders might be more willing to allow less rigorous plans.  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.  More importantly, defaulting on easy money is just as damaging as defaulting on hard. 

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.  Without one, it’s much riskier.

Second, how is your credit?

It’s unlikely that you will qualify for a low interest rate from a small business lender if your personal credit score is less than 700 even in a booming small business lending market. 

For instance, a score of 720 seems to be the magic number.  Above which, your rates start to decrease, and below which, they increase fairly dramatically.  If your score is under 700, you probably should focus on fixing your score, first. Then, you are ready and in a better negotiation position.  If not, then be ready to pay high levels of interest even in a booming small business lending market. 

Why does personal credit matter?  Because, these small business lenders will determine your ability to pay based on your credit worthiness.  If you are over-leveraged, behind, or defaulted with your personal debt, what’s to keep you from doing it with business debt where your personal risk is lower?

Lastly, do you pass the financial tests?

The most important financial test is your debt to capital ratio (DCR). Your what?  This is basically a fancy term which looks at how large of a loan you can afford based on your profits.  Fair warning, there’s a little math ahead, but it’s not too bad.  Plus, it’s important.

You calculate this ratio by dividing your total profits by your total debts. 

Debt to Capital Ratio

If the number you get is less that 1.5, you probably should stop here.  Most banks look for a DCR of 1.2 to 1.25.  They may be willing to go lower in a booming small business lending market. But, expect higher interest rates.

Importantly, these tests exist for a reason. They measure the amount of stress that you are putting on the business. That’s why they are even more important in a booming small business lending market.

If you passed test 1, then how much should you target borrowing?  The equation is below.

But, let’s look at an example: Say you made a profit (net operating income – NOI) of $100,000 last year, and are carrying $15,000 in current debts in credit cards, other loans, accounts receivables, etc, then the amount a small business lender offer would be around $65,000:

If you’ve been in business less than 2 years and/or you lack collateral to offset the debt, the annual total debt will include your personal debt as well.  So, it’s always good to drive down your personal debt if possible before engaging with a small business lender.

Is your head spinning?

If so, 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.  We’ve helped numerous small businesses deal with small business lenders. 

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.

4 Tips to Secure a Small Business Loan

secure-a-small-business-loan

When trying to secure a small business loan, there are several things to consider. Our blog post “How to Take the Pain Out of Getting a Loan” discussed in detail some of the steps to doing this, but an article we read recently made us consider some different ways to think about getting small business loans. 

Hawaii Business Journal talks about some of these points, saying:

“Know your credit score:…Your credit score is a crucial part of how a lender will assess your risk as a borrower.  Having the best credit possible is important because it provides insight into your character, and propensity to repay financial obligations.”  

Ms. Lee – Hawaii Business Journal

Amen! Between our article and Ms. Lee’s, we would like to go over our tips and give you some additional thoughts. 

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. 

“Seek advice from a mentor”

If this is your first time trying to secure a loan, you probably aren’t aware of the most common pitfall you face.  As a result, It’s easy to make some rookie mistakes.  It can be difficult to find a trusted mentor.  However, there are a few tips you can use to help in selecting the right one

Search your network:

Small business owners tend to be willing to help each other. As a result, you probably already know someone who has done this before and would be willing to help

Check their credentials:

Unfortunately, there are unscrupulous businesses and people who look to prey on small businesses, especially as the market for small business lending grows.  It pays to make sure your ‘mentor’ has done this before and is knowledgeable.  Ask for examples

Explore free services:

SCORE is an excellent resource for free advice and mentorship.  SCORE is funded by the Small Business Administration (SBA).  There is usually at least one office in every major city.  While SCORE provides a great service, it is definitely a do-it-yourself shop.  If you need more hand-holding, there are reputable consultants, who would be more than willing to help.

“Be realistic and honest”

It is very important to build credibility when trying to secure a small business loan. Your potential lender will want to be certain that the data you are providing is accurate and reasonable.

There are inherent biases in securing a loan

The one point that Ms. Lee doesn’t raise is the bias in lending practices. There are a racial and gender biases in lending.  We’ve seen it.  It’s well documented. Our clients have experienced it.

While it’s a fact, it can be managed.  The SBA has programs in place to help address these biases when securing a loan.  While helpful, they don’t eliminate entirely.  It is important to go in with your eyes open. It also helps to have some guidance.  Thus, it is a good idea to have a mentor if you are concerned this issue might apply to your business.

“Build a cash reserve & Cash flow empowers”

The first point deals with liquidity.  Liquidity is a term, which means how much cash, or assets you can quickly convert in cash, do you have.  A business with more liquidity is less risky than one that does not.   Not every business has the luxury of high liquidity. Thus, it is important not to wait until you are in a liquidity crunch to secure a small business loan.

She makes a similar point on cash flow.  You need to make a profit to pay off the loan. Lenders will look for evidence that you will have enough cash to pay off your debt.  A business with stronger cash flow is less risky.   Therefore, you are likely to get better rates.  Again, timing is everything.   Don’t wait until you are at risk of losses to try to secure a small business loan.  If you do, it may be too late.

Securing a small business loan can be very challenging.  However, it is possible if you are prepared.

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.