Destroy the 3 Most Recent Small Business Lending Myths
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The landscape for small business loans has changed dramatically in recent years. The days of putting on your Sunday best and waiting nervously at the bank armed with 10 books of financial statements and profit projections are coming to an end.
Over the past decade, banks have largely withdrawn from lending to small businesses (especially small loans, from $ 25,000 to $ 500,000) due to stricter regulations, high set-up costs, and models. archaic credit lines that make profitable underwriting small business loans difficult. This has left millions of small business owners without access to the financing they need to grow, hire employees, and invest in their future.
To close this funding gap, a new generation of online non-bank lenders has emerged using innovative technology, alternative data, and new lending models to provide fast and fair financing to small businesses looking for capital. As the small business finance industry evolves, don’t be fooled by the new myths about small business lending:
Related: Small Business Credit Still Not Returning to Pre-Recession Levels
Myth # 1: Only those with a clean credit history can get a loan.
Lenders will always view your credit history as an important indicator of your financial stability. But that’s certainly not the only indicator of a healthy business. While the clunky underwriting technology of traditional lenders might not taste like surpassing an average FICO score, new lenders are using big data and technology in a more holistic approach to understanding a company’s creditworthiness.
For example, some lenders (like my company, Funding Circle) take into account a range of traditional and alternative data – from real-time cash flow to Yelp reviews – to predict the likelihood of a homeowner paying off a loan.
While a credit score doesn’t weigh as much as it once did, it’s important to stay in good standing. If the credit score is low (in the 600’s or lower), take steps to improve it. Be prepared to discuss your company’s credit experience and clarify any late payments on the file.
Related: 5 Tips for Maintaining a Strong Cash Flow
Myth # 2: The fate of a loan application is in the hands of a faceless algorithm.
Technology is the spearhead of financial industry disruption, but that doesn’t mean computers and their complex algorithms have the final say. Big data and credit models provide valuable insight into a borrower’s ability to make payments, but only the human touch can truly assess a borrower’s willingness to do so.
Models and algorithms, sophisticated as they are, simply cannot judge character as well as humans. As a result, many new lenders combine a robust list of data points with the right balance of human and algorithmic interaction when it comes to taking out loans.
Look for a lender who has real people available to discuss your ambitions and loan options. Be prepared to present your loan application in a way that shows that you are passionate about a market opportunity and can show how you are going to pay off your loan.
Myth # 3: Expect to wait months for a term loan.
Banks generally offer the best interest rates compared to other financing options. But for small businesses looking to borrow a smaller amount quickly, applying for a bank loan can be more difficult than it is worth. And banks often don’t lend to businesses that need a loan of less than $ 1 million, and their long and tedious application process can take up to four months.
Businesses can now apply for a loan in as little as 10 minutes and, if approved, receive funds in their account in less than two weeks.
Historically, businesses looking for quick cash have been forced to turn to payday loans or cash advances to merchants, where speed comes with a high price tag and questionable loan terms.
Fortunately, some emerging players are tackling this problem head-on. By combining Silicon Valley technology with the financial sense of Wall Street, some new lenders have created loan applications quick and easy.
Research and carefully consider all options before signing on the dotted line. Some new alternative lenders may offer quick and easy liquidity, but have opaque and confusing terms. Tools such as Nav’s Annual Percentage Rate Calculators can provide insight into loan terms and actual borrowing costs.
Related: Looking for Capital? Don’t forget the small bank that could.