What entrepreneurs should know about business lendingJuly 14, 2016 6:07 pm Leave your thoughts
Getting a new business started is an expensive proposition. This is why most entrepreneurs rely on some form of outside funding to help get a small business off the ground. This can come in the form of crowdfunding, gifts from family and friends or, most commonly, lending from a bank or other financial institution.
According to Biz2Credit's recently released Small Business Lending Index, the approval rates for small business loans continue to rise. This is good news for entrepreneurs looking to finally have a platform to offer their signature innovative new product or service. But before you apply for a loan at your local bank, consider the following:
"The process of obtaining a loans is regulated by the Small Business Administration."
Small business loans are overseen by government regulators
While more than likely you will be getting a small business loan from a bank or other lender, the process of obtaining a loan is regulated by the Small Business Administration. The SBA has established specific rules and regulation that both lenders and borrowers have to follow, as well as designed processes to streamline application and approval where possible. The SBA does not lend business funds itself – rather, it guarantees the loans made by approved lenders and will reimburse a portion of the value if the borrower defaults.
Alternative lending sources are popular, but risky
Increasingly, small business owners are turning to alternative lenders. Sometimes called marketplace lending, these lenders are often based online and are put forth as an alternative to the traditional route of applying for a loan with a bank or other financial institution. In recent years, there has been an explosion in marketplace lending, with the Wall Street Journal reporting that $1.9 billion in small-business loans originated online last year.
While these lending platforms often make it simple to apply and offer a high chance of being approved, these loans have recently come under scrutiny from regulators in the U.S. Treasury and the Federal Reserve. Regulators who say that these loans need to be subject to additional rules to ensure the safety of entrepreneurs who obtain them, since many may boast low introductory interest rates which subsequently skyrocket after a few months.
"Small-business borrowers will likely require enhanced safeguards," Antonio Weiss, a top Treasury official, told the Wall Street Journal. "There is a clear need for greater transparency in the market for borrowers and investors."
Credit matters – but maybe not as much as you think
As with any loan, a lender deciding whether to approve a business loan will look at the credit history of the business owner. If you have had troubles with credit in past – including late or missed payments, bankruptcy or any major adverse event – this may negatively impact your chances of getting approved now. However, a lender will also be looking at a variety of other factors related to the potential success or failure of the business itself when weighing its decision.
"It isn't enough to project that your business will be a success right off the bat."
One such factor is cash flow. It isn't enough to project that your business will be a success right off the bat – most new businesses aren't. Your lender will want to see that you have plans in place to make payments even if your business struggles for a time.
"Really thinking through that cash-flow equation is like preventative medicine for your business," Jay DesMarteau, a small business financing expert with TD Bank, told Business News Daily. "You can either wait until [your business] gets sick, or you can do things to prevent it from getting sick."
If you are interested in taking out a business loan, personal asset protection is key. Creating a legally distinct business entity can ensure that, if the business hits a road bump, assets like your home and personal savings will not be the target of collections. Contact The Law Offices of Donald W. Hudspeth, P.C. to learn more.
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