Starting your own business is as exciting as it is terrifying. Assuming you’ve found a market niche and a way to provide value to it through an innovative product or high-quality service, you more than likely need some form of capital to start up. Still, you might be unproven — there’s no angel investors in your future, no few minutes of fame on Shark Tank, no urge to crowdfund on Patreon, Kickstarter, or Indiegogo. To make matters worse, you find yourself turned down constantly at your local banks when you try to get a small loan to just get started.
Fret not because not all is lost. There’s still plenty of options for you to find the sound financial foundation you need in order to build your empire. One of the stronger tools in your toolbox is indirect lending. Before we get into why and how indirect lending is a useful strategy to help small businesses, let’s first address why it’s so difficult to find small business lending and how to better prepare for any hurdles you’ll face.
STARTING A BUSINESS AIN’T WHAT IT USED TO BE
Not too long ago, there were many more banking options available to the average person. A town would often have a few locally-based options and maybe one or two larger national banks. Especially in smaller towns, people applying for loans might already have a relationship with their loan officer who, in turn, could be more or less willing to grant a person a loan. More often than not, even when they couldn’t repay the initial loan they were asking for, small community banks and credit unions could offer a bit more flexibility and strike a better deal between the two parties.
Then the Great Recession of 2008 happened.
With plenty of small banks failing and a fair share of large banks reeling in the aftermath of one of the greatest financial crises within the past century, this trust-at-face-value is all by dissolved. Coupled with the encroachment of larger banks swallowing up smaller community institutions, trying to get a small business loan is near impossible in today’s banking climate.
Since 2008, about 80% of small business owners who apply for loans get rejected; the volume of small business lending has declined about 20% since then as well despite small businesses being one of the greatest engines for economic and job growth within the United States. Small business loans now make up less than a third of total bank loans and trying to secure one as a new business is no easy feat.
The West Philadelphia Financial Services Institution gives us some further insight as to why securing a small business loan is difficult nowadays:
- More regulations. It’s no surprise that the Great Recession was caused by lax lending practices, lending to people who didn’t have the best proof (if any) that they could even repay the loans. With that in mind, banks are less willing to loan to riskier parties. Unfortunately small businesses — especially when unproven — are a pretty big risk in the eyes of commercial banks.
- Less profit. Commercial banks are still businesses onto themselves and larger banks are often more motivated by profit than building relationships with individuals in small towns. Because larger businesses can take out larger loans and larger loans mean more interest, small loans for small businesses aren’t nearly as profitable and thus, doesn’t make much business sense for national commercial banks.
- Less community banking. In that same vein, the smaller banks that are more apt to loan to their community members are becoming a thing of the past. Whether they’re being absorbed or outcompeted by larger banks, these advocates for small businesses are dwindling as time goes on.
But again, just because small business financing might be difficult to secure doesn’t mean it’s impossible. There are a few things you can do to be looked at more favorably if you decide to go the traditional commercial lending route.
THE SECRET TO ATTRACTING RICHES… OR AT LEAST LOANS
Because of the financial mess that was the Great Recession, providing yourself as a viable candidate for a small business loan requires a bit more legwork — though most of it is common sense that, when looking at it, should’ve been taken into account in the first place.
Chief among these factors is showing you can, indeed, repay the loan you’re asking for. Before you go into a meeting with a loan officer, you should at least know what kind of loan you need, why, and how much money you’re asking for. After those details have been established, you have to prove that you can safely repay the loan and make good on the bank’s investment in your enterprise (what is a loan but a lump-sum investment paid back over time anyway?). This proof is in the form of personal finance records that include real assets such as property, vehicles, and investments, as well as your liabilities like mortgages and other debts. A good rule of thumb is to also provide the past three years’ tax returns, income statements, and other historical documents that prove not only are you capable in paying back now, but your situation has been stable (or ideally, improving) over time.
Aside from you and your own finances as a factor, providing financial information based on your business (if it already exists and has a financial history of its own) as well as a sound business plan can bolster your chances to acquire a loan successfully. A business plan — while not required by law in some states but still heavily recommended when seeking investment or loans — helps explain your company’s mission, targeted market, products and services, cash flow and other projections. If you can’t explain your business vision to a loan officer nor how it’s viable, giving you money wouldn’t be seen as a good investment for the bank to make.
Even still, with small business financing opportunities drying up, you still might be one of the 80% who gets denied. Luckily for you, indirect lending can give you the financing you need.
THE PERKS OF INDIRECT LENDING
As the name implies, indirect lending acts as a channel between those who need loans and those who can provide them. Ideally, indirect lenders pair business relationships based on the needs and expertise of the parties on either side of the negotiating table. Moreover, because of an indirect lender’s vast network of lenders and those who need them, even if the small community banks in your town have closed up shop, you can still find smaller banks in other areas that might be able to serve you in the way you need it.
Indirect lending can also give you plenty of options you didn’t realize were available. Outside of the lenders themselves, knowing what tools they offer such as purchase order or accounts receivable financing, stated income loans, merchant cash advance loans, healthcare financing, or unsecured lines of credit.
No matter your credit or income history, the size of the loan, or what you need it for, it is Web Finance Direct’s philosophy that there’s a bank for every person. Granted, we might not be able to find you exactly what you’re looking for, but we’ll give you your best options as well as give you strategies on how to find even better ones in the future by improving your financial situation. After all, you probably wanted to start your own business so that you could build upon your own vision rather than someone else’s.
Don’t be dismayed. There’s opportunity everywhere. When you need help, all you have to do is ask.