Well Meaning Friends Can Ruin Your Chances of Securing a Loan
Has a friend ever told you to breath through your nose and out through your mouth while exercising? Where did that come from? When your body is starving for oxygen and you need to maximize your intake, athletic experts agree, “open your mouth!” In the same manner, financing experts will tell you to maximize your chance of gaining commercial financing by ignoring what others tell you.
As entrepreneurs we get advice from everywhere. If you mention to friends or family that you are looking for working capital or funds to expand your business, they will likely suggest you seek a loan from a bank. After all, that is where they go for a car loan. But, do they really have any expertise that leads them to believe a bank is the best choice for your business financing needs?
After the banking crisis of 2008, new regulations caused many banks to drastically change their criteria for lines of credit, loans, and what they keep on their balance sheet. This created a huge gap in the commercial financing world. Prior to the banking crisis, it was much easier to get the capital needed, based on a business’s good Credit, Collateral and Cash Flow. Today, however, that same good combination that used to win a loan may no longer meet the requirement. In fact, the Federal Reserve Bank of New York reported that 60% of all small businesses who applied for loans in 2016 received less than requested or none at all. This shift by banks has created a path of least resistance toward non-bank lenders. In part, because non-bank lenders do not have to follow the banking regulations designed to shrink risk. Instead, these alternative lenders can look at the big picture, not just Credit, Collateral and Cash Flow.
Many alternative lenders and lending marketplaces have popped up online. These online lenders, categorized as FinTech lenders, primarily focus on providing quick short term loans and use readily accessible data to make decisions based on a combination of traditional criteria and modern data such as online activity, marketing efforts, etc.. Many of the businesses attracted to FinTech lenders are simply looking for an easy application process and are open to higher rates to reduce the effort. Others struggle to get financed anywhere else and have to accept hefty interest rates on short term loans with daily payments. However, there is a second group of alternative lenders who operate more traditionally and provide loans for equipment purchases, working capital, franchise acquisitions, real estate and other financing needs through a more personal approach with lower fees and interest rates. Most importantly, they take time to hear your story. These are sometimes called Story Lenders and make financing decisions based on how solid the plan is for turning their money into more money. These lenders are not banks and therefore are not looking for that perfect combination of the three C’s, so decisions are made based on the parameters unique to that project.
Across the board, alternative lending has grown tremendously over the last few years. In the same Federal Reserve Bank report mentioned above, we find that 41% of all small business financing in 2016 came from a non-bank source. So, the next time you need financing, be sure and consider a non-bank lender with less resistance toward risk. They may reduce your effort and cost in securing all the funds you need. In other words, whether you need oxygen or capital, ignore the advice of well meaning friends and take the path of least resistance.