The emergence of alternative business lending was largely the result of a single discovery. You see, since the requirements for small business loans had gone unchallenged for so long, people assumed they were absolutely necessary. Not just for being approved, but for the logistics of paying back a loan. This assumes that banks only imposed these requirements because profitable business lending wasn’t possible without them. An applicant who gets rejected was clearly not in the financial position to take on debt.
Anyone who has worked with an alternative business lender knows this is not true. The aforementioned discovery was that the requirements for bank loans were not the best way to gauge someone’s ability to pay off debt. They weren’t absolutely necessary for a borrower to make payments without endangering cash flow.
Here are three things that are very wrong with the small business loan requirements of banks:
1. The bank doesn’t really measure “character”
You might have heard that “character” is among the most important requirements for a bank loan. This probably didn’t come as a shock because the term “character” denotes trustworthiness and reliability. Who would loan money to someone who doesn’t seem to possess either quality? But before you praise banks for prioritizing “character,” you must first understand that to banks, the term doesn’t mean what you think it means.
Banks claim to be assessing your personal dependability when in reality, they are judging you almost entirely by numbers on a screen. “Character” is determined by credit history, and in many cases, nothing else. The bank might contact your suppliers and other business partners but regardless of what they say about you, it’s the numbers that matter most. What doesn’t matter to banks is whether or not your problems with obligations in the past were someone else’s fault, or simply unavoidable.
A great deal of my company’s clients were rejected by banks due to credit issues. Had the bank taken the time to look into their history, they would have discovered that these problems were in no way an indication of the borrower’s actual “character.”
2. Everything stems from having only one payment system
The main purpose of requirements for bank loans is to determine risk. But you don’t have to be a business expert to envision that the applicants that are deemed less “risky” are usually those with the most available capital. These applicants have enough cash on hand to continue making fixed, monthly payments while paying their other monthly expenses in the event of an unforeseen cash flow disruption.
As you can see, this requirement is based around the traditional repayment system. Alternative business lenders have higher approval rates because they offer various repayment systems based on the borrower’s current and future financial health. Working capital loans, credit card processing loans, revenue based business loans, and business lines of credit are very different in this regard. You don’t necessarily need to be able to make fixed payments every month, immediately after funding is distributed. So, while a potential borrower might not have enough cash to make a fixed payment on top of other expenses next month, the borrower might be able to do this with ease over the next three or four months.
3. Due dates aren’t always necessary
Another tremendous advantage of certain business loans from alternative business lenders it the lack of due dates. Before applying for bank loans, applicants must figure out a due date to request. Plenty of requests were turned down because the banks wanted to be paid in full well before the requested due date. For example, let’s say an applicant requested a three-year business loan to buy inventory for the upcoming holiday season. The application would most likely be rejected because it shouldn’t take three years to pay off the debt in full.
Wouldn’t it be easier to pay off the majority of the debt when all that inventory is actually being sold? This is the basis of a merchant cash advance, a popular option from companies like United Capital Source. There’s no real due date because payments are directly tied to debit and credit card sales. So, while you would theoretically make your largest payments during your busiest period, you wouldn’t have to worry about paying the same amount once revenue drops shortly after.
So, why have these requirements in the first place?
At this point, you might be wondering why banks continue to impose such strict requirements if they aren’t necessary for being paid back or drawing a profit. The short answer is that the requirements are only necessary for being paid back and drawing a profit as soon as possible. They are designed to make money without fail. If a business cannot help the bank make money the same way they’ve been doing it for generations, the application is rejected.
Companies like United Capital Source, on the other hand, do not make money unless their clients make money. Our top priority is to stabilize and eventually improve cash flow and overall financial health. We take away what the bank makes you think you need to succeed and replace it with what you actually need to succeed.