There definitely has not been a better time to chase your business ownership dream than now. Before the 2008 financial crisis, 670,000 businesses were born annually. The year 2006 actually saw 715,000 new companies join the market. The 2008 recession did a number on small businesses putting down the dreams of thousands of business owners.
The year 2010 for example, saw only 560,000 new businesses join the fray. Most of the existing small businesses had to lay off their workers, put a stop to expansion plans and find alternative methods of business funding to survive. Actually, over 1.8 million businesses and dreams of entrepreneurship went up in smoke during 2008 and 2010.
During the recession banks hardly touched small business loan applications, with Small Business Administration (SBA) loans failure rate hitting 11.9%, as per the Coleman Report. An opinion survey by the Federal Reserve highlighted the grim statistics that during the recession over 75% of all banks had tightened their small business loan lending standards.
Better lending conditions for small businesses
A decade later, the small business lending landscape is changing for the better. Small business loan approvals have now hit a 27.2% high as larger banks with over $10 billion in assets open up their spigots to water small business funding. With the cost of capital becoming lower, more businesses are out for funding that assist them grow bigger and better.
Small businesses are described as the fuel that runs the U.S economy, and there are over 30.2 million of them. In fact, over 99.9% of all companies in the U.S can be described as small businesses. This backbone of the U.S economy employs two out of three people in the country.
With approval rates for business funding getting better, unemployment rates are decreasing, and paychecks are beginning to bring in more smiles and satisfaction than ever before. All in all as small businesses thrive, the economy is also picking up.
The approval rates are of course much higher with the community and regional banks that are do approve at least 49% of all applications. These smaller banks are positively impacting the young entrepreneurs who may not have credit scores high enough to qualify for loans from larger banks. Institutional investors have also hit historically high approval rates of 64% for example, for pension funds.
Do you qualify for a bank loan?
If you are planning to get yourself some big piece of the big bank lending pie, you need to ensure that you have all it takes for your approval process to be a resounding success. There are some fundamental issues that a bank looks at in the approval process that should be airtight for a good response. Some of these issues include;
1. A credit score that’s as healthy as a horse
Banks love a good credit score, and if yours is too low, they will reject your bid. If for example, you have a habit of late payments and impulse borrowing your credit records will not attract a bank’s attention. Most big banks only accept credit ratings above the 620 mark, and most of them will want higher scores. There is however no magic score number, and the figure one bank might reject, another bank might accept.
The key is to ensure that you critically review your credit score figure before approaching a bank. If there are any smudges on it, do as much as you can to rectify them. The number could, for example, be tarnished by your personal score thanks to nonpayment of loans, too much credit or a lack of borrowing history in the first place. If your credit rating is too low, pay up your installment loans and other debts here and start to rebuild it immediately to ensure that you will have better approval chances.
2. A great business credit history
You can build an attractive credit history just by paying your bills on time or using plastic cash albeit responsibly. Building business credit history is another story altogether. Some banks will go beyond good credit scores to the realm of fantastic business credit ratings. This can be very tricky for new businesses, but you can start to build this score today.
To start off, ensure that your business and personal finances have been separated by having a business fund only checking account. Ensure also that you have a legal structure in place for your business and use a company credit card for your business. This step will positively impact your business credit score. Ensure also that every sale and payment made to your business is reported to the business credit agencies to vamp up your credit rating.
3. How risky is your industry?
It might come as a surprise, but lenders have already determined how risky or not your entrepreneurship dream is. There are businesses that these institutions would rather keep their money away from. If for example, you are in the car sales or real estate industry, where you will be forced to issue a credit to your customers the bank might be wary of your business.
If you are in what is traditionally considered a ‘vice ‘ industry such as gambling, you might have to jump through tons of hoops to get business funding too. If you are sure however that your business acumen can weather the challenges of these risky business niches, do not lose heart. Ensure that before you have approached a bank, your loan application is sound, credible and well researched. The business plan should also display your business in the most favorable light.
4. Do you have sufficient collateral?
In the spirit of putting your money where your mouth is, a lender wants you to show up at his bank steps with assets that you are willing to put down as collateral for your loan. The banks will smile at more valuable items such as your real estate holdings or receivable accounts.
If you take them an asset with a loan already attached to it, the bank might turn you down since it cannot seize the property in the event that you cannot pay off the loan.
5. Are you already in too much debt?
If you have already utilized more than 30% of the total credit extended to you, a bank will view your loan application as a risk. By being overextended credit wise, you do stand a chance of being unable to repay them for their loan.
If for example your line of credit is $100,000 and you have utilized at least $90,000, then you are a risky borrower as far as banks are concerned. Ensure therefore that you borrow loans moderately and responsibly to ensure that you are all set if you need a small business loan from a big bank.
The final word
In case you have a few details to streamline before accessing a loan from a bank do not lose hope. There are alternative lenders out there willing to fund your dream business with fewer stipulations and requirements. They are friendlier to borrowers most banks term as risky and even give loans to borrowers with poor credit scores.
