At one point or another, most small business owners have considered applying for a small business loan. It’s probably also fair to say that when business owners think of business financing, they think of getting a 10-year bank loan at 3 percent.
Unfortunately, that is all but a faded memory. That was the standard maybe 10 – 20 years ago or longer. A lot has happened since then. Back then, it was all about relationships. The banks knew you personally. The term “mom and pop” was literal, and you were a proud member of your community. You were a local merchant supported by a local bank. You can undoubtedly age yourself if you remember passbook saving accounts where they typed in your withdrawals and deposits into a little passport-sized book.
Boy, times, and technology changed. Now you Google “financing option” and thousands of pages appear. You have a smorgasbord of choices from small business loans to commercial real estate loans, to a merchant cash advance. If you can’t get approved by the bank – no problem. For every business, there is more than one potential lender.
The question is, is it a good idea to get a business loan?
That depends on who is asking. Some of the best insights come from the 2019 Federal Reserve, Small Credit Business Survey.
Here are some of the highlights of the report:
- 64% of employer firms faced financial challenges in the prior 12 months. More than two-thirds addressed these challenges by using the owners’ personal funds.
- 45% took out additional debt
- Loans and lines of credit are the most common types of external financing used by employer firms.
- 70% of small employer firms have outstanding debt.
- 86% of employer firms rely on their owners’ personal credit scores, similar to 2017 responses
- The 2018 survey finds that 43% of employer firms applied for financing in the prior 12 months.
- 23% Financing shortfall
- 48% of financing needs met
- 29% May have unmet financing needs
- In the 2018 survey, 47% of employer firms that applied for credit received all of the financings they sought.
- Low credit risk applicants were more likely to receive all of the financing sought, compared to medium or high credit risk applicants.
- Funding shortfalls were most acute for firms seeking $100K–$250K, consistent with findings from the 2017 survey.
- 54% of small employer firms that applied for $250K or less did not receive the full amount of financing sought.
- The share of applicants who sought loans, lines of credit, or cash advances from online lenders has grown markedly.
- 85% of applicants sought loans or lines of credit.
- Medium/high credit risk applicants were more likely than low credit risk applicants to apply to online lenders.
- Speed of decision making and perceived chance of funding were the top reasons firms applied to online lenders.
- Applicants more often chose a lender based on an existing relationship or their chance of being funded than on costs.
- Loan/line of credit and cash advance applicants reported higher approval rates in the 2018 survey than in previous surveys.
- The share of applicants approved for at least some financing is highest for merchant cash advances and auto/equipment loans.
- Loan/line of credit and cash advance applicants had higher approval rates at small banks and online lenders.
- Medium/high credit risk applicants had higher approval rates at online lenders than at banks.
- Bank applicants were most dissatisfied with wait times for credit decisions. Online lender applicants were most dissatisfied with high-interest rates.
- Applicant satisfaction is consistently highest at small banks.
- 57% of small employer firms were non-applicants, meaning they did not apply for new financing in the prior 12 months.
- 54% of non-applicants and 77% of applicants experienced financial challenges in the prior 12 months.
- 71% of non-applicants regularly use external financing. Many regularly use credit cards or loans/lines of credit.
- Banks are the most common source of credit for non-applicant firms that use loan/line of credit or cash advance products.
Do business loans show up on personal credit?
Financing your business is based on both your personal credit score and business credit scores. Every loan application, whether from the alternative lender or for bank loans, will require providing your social security number and EIN. Anyone who tells you that they can do a no doc, or you don’t need to provide your SSN is just not being upfront with you.
To a certain degree, your personal credit score impacts every loan decision. Getting a loan for your business from the bank will require a strong personal credit score. Usually, they need a score of at least 680, if not higher. Loan approval from an online lender may only require a score above 500.
The banks and credit unions will almost always require personal guarantees, require collateral, and results in the reporting to the personal credit bureaus. The online business lenders, especially the alternative and business cash advance companies, will do a soft credit pull to analyze your loan application and, if approved, will report only to the business credit bureaus. Upon approval, they will do a hard credit check.
There is an advantage of not having the reporting to your personal credit. The loan will affect your credit score and increase your utilization. The loan programs that only report to the business credit bureaus have little to no impact on your personal credit. As long as you repay your loans for business promptly, it positively impacts your future borrowing ability with banks and more traditional lending institutions. The key is to be able to borrow without the notorious “PG” or personal guarantee.
Is it hard to get a small business loan?
No, not really. Do you have a real business? Are you making money? How’s your credit? Even those that can’t get a business loan can sometimes get approved and can get a personal loan for business. While we may not recommend this approach, as a business owner, you do whatever you need to do to survive.
The truth is that there is a plethora of lenders competing for your business. Increased access to lenders means an increase in loans. With the good comes the bad. There are pros and cons. The explosion of business lenders means more opportunity for everyone. Right? Well, the knife cuts both ways. The increase in competition is a boon for the borrower. There are more types of business loans today. Business lending is at an all-time high. You can find a comparison tool for any kind of financing. Loans rates are down. Capital available like never before. What can be bad?
Like in the movie Star Wars, there is a dark side. Both lenders and borrowers have figured out a way to take advantage of each other. Who’s to blame? Rather than point fingers, let’s look at what is happening.
When borrowers take out multiple loans from different lenders, especially in a short period, this practice is “Stacking.” Now, this happens for several reasons. The first reason is the borrower feels they did not get approved for enough money from the original lender. The result is taking additional loans, all with different loan amounts and loan terms. Other times it is for more nefarious reasons. Regardless, the business owner doesn’t fully appreciate the consequences when they borrow money. The internet is impersonal. You never see your lender or their office. Because the application processes are so seamless and straightforward, it is too easy for the business owner to take advantage of the system. This strategy can lead to a disastrous outcome, including going out of business. The weight of the loan terms and payments is too much for the company to bear. It crushes their cash flow.
On the flip side is the unscrupulous sales rep or independent broker who is motivated by the additional commissions generated by multiple loans. The attitude is caveat emptor. Most lenders have as part of their agreement that stacking or taking on other loans is a violation of their terms and the agreement.
What are the benefits of a small business loan?
The primary benefit is that the loan can help you build your business. Whether it’s business startup loans, business lines of credit, or equipment financing, you get a chance to build your dreams.
If an owner needs to take a loan out for some much-needed funds, generally speaking, they’ll try to acquire a small business loan rather than other types of loans.
Here are several reasons why acquiring a small business loan may be a good idea for your business.
There are multiple reasons why small business loans can be great for helping you expand the operations of your business.
Acquiring a new location or expanding your current one at the right time can be a boon for your business. The loan provides an opportunity to take your operations to the next level.
Increase Working Capital with a Line of Credit
Working capital is the money that businesses use to manage their day-to-day operations. Small businesses sometimes need to take out a loan to meet their daily expenses, especially when they are just starting up. Loan products that enable you to add inventory or buy bulk supplies at a discount are an excellent use of funds.
As the business grows, they will be able to repay the money lent to them. If you require funds to help cover expenses, a small business loan can be a good idea.
Other reasons are:
- Get New Equipment
- Hire Additional Staff
- Pay for Insurance or Taxes
- Purchase Real Estate
Some final words of wisdom.
Keep Your Personal and Business Funds Separate
Some business owners will consider taking out a personal loan, but it is generally advised to take out a small business loan instead, and not just to help make your finances and taxes easier.
Many lenders and the IRS, in particular, will look suspiciously at tax returns that combine personal and business expenses. If you combine both types of expenses, it makes the job of discerning your business credentials much harder, which probably won’t help the chances of you getting a loan.
Also, mixing your personal and business finances may put your personal assets at risk if your company finds itself in a lawsuit, regardless of how your company is registered.
Build Your Business Credit
Rather than relying on your personal credit history, taking out a business loan can help you establish the credit history of your small business. Building business credit is especially helpful if you have bad credit.
Doing this will help you to keep your personal and business finances separate and can put you in a great position should you need to take out a small business loan at a later date.
Get a Loan with Generous Term Lengths
SBA small business loans (through the Small Business Administration), in particular, can be a fantastic idea. SBA loans, also known as 7a loans, come with a great many benefits including:
- Projection-based underwriting
- Lower down-payment requirements
- Financing for a majority of project costs
- Caps on interest rates, including a cap of 2.75 prime on loans
In general, getting a small business loan means that you may receive more generous terms as well as reasonable interest rates.
Are small business loans a good idea? The simple answer to this question is yes; a small business loan can be a solid choice for your business. Obtaining a small business loan can give you the boost you need to help get your business off the ground and grow.
Sunwise Capital can offer a small business loan to your company, even if you have previous challenges getting approved. Call 888.456.9223 or contact us today and let us see what we can do to help you.