In years past, options for financing your business were limited. Just a generation ago, your bank was the first of few stops available if you needed a business loan. If you were old enough to be in business before the mid-1990s, you may recall how formal it was. You had to make an appointment with a loan officer, gather your financial statements and tax returns, drive to the bank, and answer the loan officer’s questions. If the bank declined you, you drove to another bank and applied there. You kept doing this until you either got approved for a loan or gave up.
Big banks or small banks?
As an example, Bank of America’s lending criteria is generally two years’ time in business, minimum revenue of $100,000, and excellent credit, according to Bank of America Small Business Direct Sales. The loan criteria of other major banks generally mirror these standards.
Traditional banks are still difficult to work with. In fact, the largest banks are the most stringent. The “big box” banks are highly visible brands, and are often the first stop for business owners looking for loans. Novice business owners looking for money frequently approach the big banks first in a fruitless search for a “startup” loan.
Two years’ time in business and $200,000 in revenue? That eliminates startups. If you are a startup, save yourself the aggravation and avoid the big box banks.
If you are able to get a small business loan without strictly meeting the above rules, it will most likely happen with a much smaller lender. There are two major reasons for this.
First, smaller banks are trying to grow into bigger banks, and therefore lend more aggressively. Second, they lack the layers of bureaucratic management common in the bigger banks. That is significant because if your situation falls outside the normal lending guidelines, additional approvals are needed. The more managers who must approve, the greater risk your request will arrive at the desk of a conservatively-minded underwriter or manager who will decline your application.
Big banks certainly have their advantages. They tend to be operationally very advanced, with multiple products and services that can be bundled or provided at no cost. They are convenient, visible, and with excellent merchant-processing and check-clearing networks, and could therefore greatly improve the cash flow of your business. But the two-year time in business requirement remains a significant barrier to startup financing.
Can I get a small business loan online?
If you want to see what your loan options are, you can do that right here. LendingTree has a network of dozens of lenders, all accessible by completing one form. You answer questions about your revenue, time in business, credit score, and a few other questions about your business.
Once you have answered these questions, you are then presented with options of any lenders whose criteria you have automatically met. You can then proceed with the lender of your choice.
Yes, you can expect a personal credit pull. The good news is that your credit is pulled once for use by many lenders, as opposed to having your credit pulled by one lender at a time over possibly several inquiries. Credit inquiries can affect your credit score, but concerns about their impact on credit score are generally overblown. It may be five points or less on your score, but lenders account for the fact that you are looking for a loan. Bankruptcies or foreclosures are serious events that impact your credit score. Inquiries resulting from loan applications while you shop for loans are not.
Here, LendingTree explains the difference between a “hard” and “soft” credit inquiry.
Click here to see your options.
Should I finance a business with credit cards?
Be careful with building a business on credit cards. The rates could be higher than other forms of loans. That, and a personal guarantee is usually required. Therefore, a default on a business credit card subject the owner personally to collection efforts, and will impact the owner’s personal credit.
Occasionally, they are a great way to grow a business, if there is no other credit available and the needs of the business are relatively small.
Just like with small business loans, this credit card tool can show you what options are available for you.
I hate to use my home as collateral, but if I did, how would that work?
You are correct to be cautious about pledging your home as collateral for a small business loan. After all, if you refinance or obtain a home equity line of credit (commonly known as a HELOC), you are taking a mortgage on your home. In the event of default, the property is at risk of foreclosure.
That’s a bit of a test, isn’t it? The thought of betting your home on a business just prompted you to evaluate your confidence in your business plan.
There are a few moving parts to a mortgage, but standard guidelines require 80 percent loan to value (LTV). This means that for every $100,000 of appraised property value, the bank will lend $80,000.
What about rates? As of February 2020, average fixed mortgage rates are around 3.5 percent, nowhere near their October, 1981 high of 18.45 percent. As with any loan, the better your credit, the lower the rate you can expect to pay.
HELOC interest is no longer tax deductible unless the proceeds of the loan are used to improve a home. However, you can use funds from a refinanced mortgage in which cash is taken out without similar restrictions. Tax treatment for HELOCs and second mortgages changed after tax reform passed in 2017.