Direct business lending is a forward-looking financing approach
As a microenterprise operator, you are mentally and physically focused on getting your business to return a profit. Despite making a vow to work hard and rely less on credit from banks and other lenders, the experience is different. A business needs to borrow money if it is to survive. Direct business lending is when you obtain funds without passing through the bank network. As you may have realized by now, the United States has its fair share of financial crises. As a result, banks are now hesitant to lend money to businesses.
The reality on the ground
About 120 million citizens work in America’s private sector. Out of every three jobs that the U.S. economy creates, three of these are from micro-enterprises. However, following years of recession and a hard-hitting credit crisis, small businesses are finding it increasingly difficult to stay afloat. Interestingly, the situation has given rise to the proliferation of online business lenders. Using technology, these highly creative entrepreneurs have disrupted the lending market. Customers can now get credit fast plus there are online systems in place to obtain a borrower’s credit score almost instantly.
Discomfort in banking circles
Banks are always uncomfortable when called upon to finance a risky venture. The good news is that with financial institutions heading for mainstream borrowers, small business owners do have alternatives. Sadly, many entrepreneurs either do not trust or do not know of the existence of these business financing options. When you need money to upscale operations, your first point of call is a bank. Despite banks being the right places to look for financing, that is not where you will get the cash. According to research alluded to in “The Five ‘C’s of Small Business Lending,” 59 percent of entrepreneurs approach banks for lending but only a paltry 27 percent get financing.
Qualifiers to obtaining financing from the bank
Credit managers in banks judge borrowers based on their business character. You may find this awkward, but a lender will evaluate your management team. If you have a solid team in operations, your bank may get interested in offering easy business loans.
No traditional lender will listen to you without first investigating your credit score. Alternative business capital lenders, however, are confident and willing to handle the cadre of lenders whose scores fall below 500. Even with such boldness, they too have their thresholds. The bottom line is that nearly every lender out there has an interest in credit scores. You can easily tell why. A credit score measures your commitment towards financial obligations.
On the other hand, alternative lenders are ready to discuss funding provided you can prove that your score is not necessarily because of poor handling of credit. For this reason, you must ensure that you get acquainted with your personal credit report. Be prepared to defend all the negative entries and give your lender reasons to ignore the score and fund your business.
Your business’s revenue capacity has a bearing on whether you can get funding or not. No lender directly or otherwise can give you a loan when they know too well that you are incapable of repaying it. Besides, you could be having a fantastic credit rating, but your business has no revenue history. In that case, if you are a startup with the sales yet to show, getting finances might be a little hard. Your story need not end here. You could still reach out to your family members or close friends.
Ordinarily, before a bank or other lending institution lends you money, they expect that you have something at hand. Their risk-averse nature is what makes banks cling on to the expectation that you have at least some capital in place. Only then can you convince them that the loan you seek is not to salvage a dying business but to strengthen an already vibrant enterprise.
Collateral or the lack of it is an issue of great concern too. Both traditional and non-traditional direct business lenders love to play the collateral card. What you are looking at are assets such as real estate or equipment whose value can stand in the place of the funds you seek. Other alternative institutions can, however, consider non-tangible assets such as accounts receivables.
Nevertheless, the best way to keep your business ready for funding is by keeping your finances in order. For instance, whenever you seek a bank’s assistance, they will request for your financial statements and tax returns. Lenders always have a motivation for giving out business loans. They exist to generate profit out of their operations. There would be no sense then for a financial institution to deny you credit.
If you have a history of overdue loans, bad debts or even bankruptcy, lenders will hesitantly finance your business. Also, when they do, they offer you credit at high rates of interest plus the demand to have co-signers or guarantors. Here are other options you can try if the banks have said no:
Here, you connect to a network of businesses that are ready to fund projects and earn interest in return. Others require a share of equity in your enterprise. Through an online platform, you can share your idea in a platform, and if someone likes it, you can have access to funding.
- Equity financing
As mentioned above, in this mode of lending, you must shed a portion of your equity, and in exchange, you get the money needed. Apart from providing funds, venture capitalists have wide networks with other enterprises. Through this association, they have a vast knowledge of how businesses run and can counsel or give the insight you never had.
- Invoice factoring
Inability to provide collateral or meet other stringent requirements put in place by banks should not discourage you from examining other avenues. Factoring houses buy the value of outstanding invoices. In return, they finance you to the tune of 80 to 90 percent of the cost. For this service, they only charge you a small fee. Invoice factoring can be an ideal source of short-term funding.
Getting financing for a business that is in its formative stage is not easy. Traditional lenders put stringent requirements that discourage many borrowers. Availability of capital, having collateral and a revenue history are just but a few obstacles for small enterprises. Thankfully, you can use the direct business lending avenue and still obtain funds to keep your operations afloat.