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4 Key Questions Clients Ask About Small Business Financing

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Jun 23rd 2016
Director, Accountant Advisor Program OnDeck
Columnist
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The world of small business finance has changed a lot in the past few years. Because you are a trusted source of financial information and offer advice to your clients, let me share some of the common questions business owners ask regarding small business financing options.

1.I need some extra capital for my business. Where should I start? My bank?

The local bank has been the traditional source of capital for small businesses and is still a good source for those that meet the bank’s criteria. Unfortunately, that excludes a lot of smaller businesses that can be good borrowers.

If you have a client who would like to borrow from the bank, this is what a bank commonly will be looking for (although individual banks might vary):

They’ll need a few years in business. Bankers want to see some sort of track record – often four or five years in business. They’re trying to predict what your clients will do in the future based upon what they’ve done in the past. Although some lenders will accept a shorter time in business, it’s frequently “the more, the better” at the bank.

Substantial annual revenues. Although this benchmark can vary, banks typically want to see annual revenues around $1 million, preferring to work with bigger companies. In other words, if you have a new client whose business only does a few hundred thousand in revenues every year, he may not be a good fit for the bank.

A personal credit score of 680 or better. There are times when a bank will approve a loan if the business owner has a personal score as low as 680, but they typically want to see a better-than-average score, which commonly means 700 or better. Fortunately, because there are situations where a healthy business with a strong business credit profile could have an owner with a less-than-perfect personal score, there are lenders that look more at additional metrics focused on the health of the actual business. So, if your client doesn’t fit the right personal credit criteria at the bank, she still has options.

Specific collateral to secure the loan. There are many businesses that might not have adequate collateral to secure a small business loan at the bank. Banks are typically looking for real estate, heavy equipment, or other assets of greater or equal value to the loan amount. There are other lenders that will apply a general lien on business assets in lieu of requiring or valuing specified collateral, making it possible for a small business owner who lacks sufficient collateral to get a small business loan.

Time to wait. Your clients should be prepared that the application and approval process at the bank may take up to several weeks or more, which will probably rule out responding to any quick need for additional capital to take advantage of a growth opportunity, like ramping up for a new contract or purchasing quick-turnaround inventory at a steep discount.

2.What about online lenders?

You’ve likely read or heard about online lenders just like your clients have. It’s a pretty broad category, but there are some online lenders that focus exclusively on small business lending and could be a good fit for your clients. The criteria that many of these lenders are looking for is a little different than the bank.

Been in business for at least a year. Like the bank, these lenders want to see a track record, but unlike the bank, they may only look for a year in business rather than four or five years. This could be good for the younger companies you work with, provided they meet some of the other criteria these lenders are looking for.

Annual revenues of $100,000 or more. Some online lenders are often able to work with growing companies that just don’t have big revenues yet. They believe a healthy, growing company doesn’t necessarily need to have $1 million in revenue to be a good borrower.

A good credit profile. Because a business owner’s personal credit score is not necessarily a reflection of how a business entity satisfies its business obligations, most online lenders consider this only one of many metrics to evaluate a business’ creditworthiness, rather than a go-no-go metric as a bank might. If the business credit profile is strong, and other business-specific metrics indicate a strong and healthy business, a business with an owner who has a score as low as 600 (and sometimes even less) may still qualify for an online business loan.

Online lenders are sometimes able to lend to businesses that might not find success at the bank, providing greater options for capital to fuel growth or finance other initiatives. In some cases, because they are equipped to work with the smaller small businesses, like mechanics, dry cleaners, restaurants, and other Main Street merchants most of us think of when we think of small businesses, online lenders have become the first choice for many businesses that need capital quickly. In many cases, a business will have an answer regarding approval within an hour (sometimes as quickly as a few minutes) and can have money in its business banking account as quickly as within 24 hours in some cases.

You might be interested in a recent survey released by the Electronic Transactions Association that asked 592 business owners about their experiences with online lenders. The results underscore small business success and satisfaction.

3.What is a short-term loan, and does it make sense for my business?

A short-term loan might not be the best fit for every business need, but could be a viable choice for short-term needs, like ramping up for a new contract, bridging a seasonal cash-flow gap, or purchasing quick-turnaround inventory at a discount. Loans with terms under a year will sometimes have a higher APR than a loan term of several years, but will usually have a lower total dollar cost.

As a general rule, longer-term loans will have a lower periodic payment and a higher total interest cost than short-term loans. Short-term loans will likely have a higher periodic payment, but a lower total interest cost.

When advising your clients, it’s important to make sure they have the cash flow to support the higher periodic payments over the course of the shorter loan term, and to be sure the loan is the right fit for their particular need or use case.

4.A lender wants to direct debit from my business bank account. Is that common?

Direct debits on a daily, weekly, or monthly basis are a fairly common practice among many lenders (including online lenders). It is important to note that a more frequent payment interval may help remove the lumpy cash-flow burden that may otherwise be due at the end of the month. If a lender requires a daily or weekly debit, it’s important to make sure your client’s cash flow is consistent throughout the month. A daily or weekly payment schedule might not be a good choice for businesses that rely on a month-end influx of cash flow to maintain business operations or on infrequent inward deposits.

While there are more options available today than ever before, terms, interest rates, payment schedules, and other requirements can vary greatly. You are in a unique position to help your clients determine what type of loan will meet their business need, is a good choice for their business, and whether or not they’ll likely qualify.

Related articles:

How to Advise Clients on the New World of Small Business Financing
Are CPAs and Small Business Lending a Match Made in Heaven?

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Rowan Webb
By Rowan Webb
Mar 27th 2017 02:00 EDT

These tips are really beneficial even for companies that have been in the industry for quite some time now. New financial queries rise up every now and then and a new and updated list ought to be shared in order for clients to get the latest insights as what to ask as well as companies to know what to expect and to prepare the required info in detailed for a more comprehensive understanding for both parties to benefit from.

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