Most business owners do the same thing in terms of financing: gathering a series of documents, going to their local bank… and praying. If you are talking to a traditional lending institution can offer excellent products, this is certainly not the best avenue for business owners who want to access capital.
In the modern world, cash-strapped or fast-growing businesses need money quickly. But traditional banks do not have the essential ingredient that business owners need; Fast turnaround time
Many times, business owners can spend several hours gathering their documents that a bank may require, and then wait 10 days for the bank to withdraw their credit (no kidding). Take a look at this below: We pulled this directly from Crediter
As you can see, there is a ton of documents to enter to start the process. This can be a daunting task.
But below, you’ll see why all this documentation is needed. Here is a picture comparing the number of Crediter 7 (A) loans with the average size of Crediter loans over the last 10 years. As you can see, the number of Crediter loans has dropped significantly and the size of the loans has increased. Why is that?
This is the case for several reasons, but before exploring these reasons, consider this: In 2012, the average loan granted by the Crediter amounted to 350,000 euros. Is it safe to assume that all companies needing a cash injection need 350,000 euros ?!
Three hundred and fifty thousand euros represent a huge debt for your average small business. In a study by Forbes Magazine, the average small business generates € 44,000 a year. Medium-sized companies are unlikely to commit to the average debt of the Crediter and the big banks.
OKAY. Here is my shot.
Let’s see why getting a small business loan in a traditional bank is hard to accomplish.
1. They do not make money on you.
Let’s be real. Banks are businesses and they have to make money. While their CEOs describe the bank very well as a place for depositors, they aim to make money. When the average owner of your business comes in and earns € 44,000 a year and the average bank loan is € 337,000 and the average rate is 6.25%, do the math. Of the € 337,000 over 10 years at 6.25%, the current value of the note in the tenth year is € 454,060.71.
Here is the calculation of the case. The bank earns $ 117,060.71 over 10 years, or $ 11,706.07. For a business owner making 44,000 euros per year, the amount of 11,706.07 euros seems to be a very good deal.
But check this:
If you go into Yahoo Finance, type “BOA” and check the income statement, you will see that the total turnover of Bank of America amounts to 95 181 million USD.
Here is my point.
They do not make money on you, the owner of a small business.
It’s literally 1.2298e-7
2. Most business owners can not qualify
At a recent study done at BizJournals.com only 1 in 5 small businesses that apply for an Crediter program can be approved.
A) Credit conditions
For starters, the average credit rating for a traditional bank approval for a small business loan is at least 680.
If you are under 680, you can count on the fact that you will not be approved. Unless your compensation factors (activity time, income, use of fundraising, commercial credit, etc.) are so outstanding that the branch manager has called.
B) Revenue requirements
As we pointed out previously, the average activity in America generates 44,000 euros per year. Here at Ventury Capital, we can only get approval from the Crediter if a business owner has generated € 200,000 a year.
That’s five times the national average.
We believe that the reason behind this, regardless of margin, personal credit rating, time and business, is due to the fact that they can not make money with such a small loan.
C) Required documentation
You see above the list of documents required for submission.
It’s a lot.
Quite frankly, most companies do not have all of these documents when they need money.
They just know they made the money.
So, there is the first hurdle to collect:
i) Personal context – Better to pass. Criminal records are a “no-no”
ii) Resume – All business owners and shareholders must submit a resume.
iii) Business Plan – All loan programs require a solid business plan to be submitted with the loan application. The business plan must include a complete set of projected financial statements, including an income statement, a cash flow and a balance sheet. These must meet their requirements.
iv) Personal Credit Report – As stated above, must be greater than 680. Do not appreciate tax privileges, judgments, bankruptcies, unpaid bills, or recoveries, commercial or otherwise.
v) Business Credit Report – Do you even know what business credit is? Do you have any? Do you know what is your Paydex score?
vi) Tax returns – You can not take too much house or too little.
vii) Financial Statements – Balance Sheets, Profit and Loss, Business Income Tax Returns. Can not bear the losses. Regardless of anything you want to erase, it can hurt you.
viii) Bank Statements – Make sure there are no negative days, NSF. make sure your daily final balance stays above 10% of gross deposits. Make sure you do not have significant fluctuations in your business. Crediter loves consistency. Seasonal businesses are left in the dust.
ix) Guarantee – This is where they receive you. Strong businesses can avoid this, but most often your home is not used as collateral.
x) Legal Documents – Commercial Lease, By-Laws, Shareholder Agreement, Commercial Leases, etc.
It’s just to start.
3. Regulations make things difficult
As a result of the financial crisis, the demand for small business loans has declined significantly. At the same time, lending standards have tightened considerably. As a result, companies that saw DID as an opportunity to grow during the crisis could not access the capital they needed because the EDF had blocked it.
According to the Office of the Controller of Credit’s Underwriting Practices Survey, banks have strangled corporate lending standards in 2008, 2009 and 2010. In 2011 and 2012, the problem of loan standards was dropped… a little bit.
But as the recovery actually progressed, lending standards for small businesses continued to tighten. All this despite the beginnings of the recovery. These stricter standards were motivated in part by increased oversight of regulators. In the wake of the Great Recession, regulators began to take a closer look at small business loans.
They demanded that the banks raise the bar.
4. Personal credit is the key to approval
It’s really a unique situation with all the personal credit. During the 2008-2011 debacle, many people, but especially business owners, suffered huge financial losses. The end result is that the personal credit of business owners has been hit hard.
Many have had a personal guarantee of their business, they lost their home or investors lost their IRAs, their pensions and their real estate were seized. We have seen hundreds of credit reports ranging from 750 to 500.
That does not mean they have a bad deal right? As the recovery continued, business owners were still stuck with this lower credit rating because of this 3-year period.
They still have today. Thus, when it comes to obtaining a loan from a small business from a traditional bank, history often precedes the ability of a business owner to access capital.
Examine the average personal credit score over time, broken down by age. So what can you do to give yourself a better chance of getting approval for an Crediter loan?
1. Make sure your credit is well placed. There are thousands of credit repair companies. We recommend the National Credit Federation.
Not only do they have 1000 testimonials and millions of deleted tradelines. We own them. We are proud of companies ?
2. Make sure you understand what a true business plan is and how to structure it.
We have free content on how to collect this here: http://venturycapital.com/writing-a-business-plan
3. Time spent in business is always an advantage.
One way to take advantage of this is to understand your market. As with anything else, the markets are changing and the one who is most willing to capitalize on this change is winning.
Wait for a moment of the year when you will find that a great effort could be made. Even 12 months to 18 months is a big difference in terms of qualification.
4. Increase your sales.
I know that goes without saying, but remember that the average loan of the Crediter is 337,000 euros. To qualify, it is better to have good sales on your books without losses.
If you click on this link, we have other tips for getting a small business loan.
Money for capital is the key to your success.
Understanding what the company will do to qualify for a bank loan is also critical to your success.
The Crediter is not a bank, but a guarantor on the note issued by a bank. This ensures that your notes are protected by the federal government.
It is difficult to qualify for a small business loan, but every year, billions of euros are eligible.
You will want to be sure to have all your “ducks in a row” before going to your bank on the street. They will ask you for documentation.