When applying for an online business loan, lenders will ask for three months of business bank statements, examine the business owner’s personal credit history and require a personal guarantee.
Technology has made it easier than ever to apply for an online business loan. Yet just because it’s easier to apply, doesn’t mean it’s easier to actually get funding. Especially if you’re a small business owner. In fact, the overwhelming majority of online business loan applicants are rejected. There are several ways to mitigate the chances of this occurring and to prepare your business to be approved for financing. Before we delve into the most important steps you should take, though, let’s examine the options available to a small business.
We know. The entrepreneur’s cliche of all cliches. It’s a fact that most small businesses started with seed money from a close circle of friends and family. This article from Entrepreneur.com speaks to the positive and negative aspects of asking friends and family for money. Even this method has been popularized and brought into the tech world by high profiles websites such as Kickstarter and Indiegogo. But like the theme of this article, even though it’s easy to set up an online profile, it’s not always easy to get money this way. The vast majority of startups fail because they lack the critical financial resources to ever get off the ground.
Those in the position to leverage personal credit or assets such as homes, cars or other assets, might consider leveraging those before asking for help from friends and family. Small personal loans are supposed to be utilized for personal reasons and not for businesses, but it happens all the time. If your credit is in good enough shape or you have equity in a home, this can often be the most cost effective way to procure funds for a small business or a startup.
It should go without saying that if you are in need of business capital and have the ability to secure a loan from a traditional lender such has a community bank or even one of the big banks, this is one of the best options. Small businesses that are profitable, have been in business for several years and can demonstrate future earnings will find this method preferable to most other options. Unfortunately, banks still aren’t lending at nearly the same rate they were prior to the financial crisis and small businesses have been on the receiving end of more “no’s” than “yes’s” over the past decade.
For businesses that have been around for a few years, have positive financial statements, timely tax filings and assets on their balance sheets, financing from the SBA is the very best route to choose.
Online Business Loan (Merchant Cash Advance). This brings us to the point of this article. If you aren’t able to tap into friends and family, don’t have enough personal equity in your home or fall short of the stringent requirements of most financial institutions, you aren’t alone. Applying for an online business loan or merchant cash advance (MCA) is easier than ever these days, but it’s imperative to understand the process and prepare your personal and business credit in advance. Most companies are declined when first applying for capital online because they fail to follow several critical steps. Below are 10 ways you can prepare your profile for approval.
1. Startups need not apply. Unfortunately, startups rarely (if ever) fare well when applying for an online business loan. Don’t take it personally. It has less to do with your idea or how trustworthy you are and everything to do with underwriting. As we’ll discuss below, there are several critical items underwriting teams review when evaluating an application. Startups simply don’t possess most of these items and are, therefore, better off going the “friends and family,” or personal credit path.
2. Credit Pulls Matter. One of the biggest mistakes we see time and again is a business profile that looks reasonable but the owner’s credit has been destroyed by too many “hard” credit checks, or “pulls.” Because it’s so easy to apply for a loan online, business owners often apply to multiple websites for funding and go far enough down the road that they authorize “hard” credit checks instead of getting pre-approved with a “soft” check that doesn’t wind up on your credit report. The business owner’s personal credit is an important part of the profile and application process, making it important to guard your credit vigorously. We recommend following the steps below, then working with a trusted broker to navigate the process and avoid costly mistakes such as this.
3. Personal Credit. We’re going spend some time examining this one because, believe it or not, even though you’re applying for a small business loan, one of the most important factors is your personal credit as the business owner. One of the first questions you will receive when applying for a business loan or MCA online is what percentage of the business you own. Applicants who own less than 50% of the business will be asked to co-apply with the majority owner or others who make up the majority of ownership.
Given how easy it is to determine your personal credit score, commonly referred to as your “FICO” score, it’s astounding how many people still don’t know it before applying. The first thing you should do, if you haven’t already, is open an account at a free resource such as Credit Karma and determine your personal financial profile. Creating an account doesn’t affect your credit score in any way. Sites such as this make money by providing you with credit card and personal loan options based upon your score and profile and taking a percentage of any successful applications you submit. Your score affects the rate you will ultimately receive and is a leading indicator of your ability and willingness to pay back a loan. If your credit score is considered “poor” (less than 600) or “fair” (in the 600’s) you might consider taking steps to improve it before applying for a business loan.
Low personal credit could be the result of negative factors such as a low profile (not enough credit), too many hard credit checks (you’ve applied for credit too many times) or delinquent payments on loans such as mortgage or auto. If you fall into the latter categories, knowledge is power. Take a break from applying for loans if you have too many hard credit checks and do whatever it takes to get current on outstanding loans. We recognize this is easier said than done, but it will be difficult to get a business loan if your personal situation is in need of improvement.
If your credit suffers from a “low profile,” meaning you don’t have enough outstanding debt, we recommend doing something that might seem counterintuitive at first. You might want to consider taking a small personal loan or credit card. Be forewarned that the rates on these loans or cards will be high so it’s critical to take a very low amount (if it’s a loan) or charge very little (if it’s a credit card.) Timely payments over a matter of a few months will have a large, positive impact on your credit profile and demonstrate to the ratings agencies that you are willing and able to pay down debt in a responsible and timely manner.
4. Business Credit. If so many people still don’t know their personal credit score then you can imagine how few truly understand their business score. Business credit scores look much different than personal scores, but it’s just as important to know. Unfortunately, there’s no way to determine your business credit profile for free, but there is a quick and cost effective way to determine where you stand. Any registered business that files taxes and has a federal tax ID number can check its profile at a ratings bureau such as Experian or Equifax. Experian offers a one-time credit profile for $35.00, as an example, at which time you’ll receive a brief overview of your business profile including any outstanding liens or judgments against your company. It’s better to know of any hidden issues in advance because the lenders will look at your score. There’s no reason to be surprised by what they find.
5. Manage Your Bank Statements. Next to your personal and business credit profiles, your business bank statements are the most important factor to underwriting teams at traditional and online lenders alike. Your bank statements offer insight into how you manage your business and determine whether or not you’ll be able to pay back a loan of a particular amount, rate or term. If you have a large number of insufficient fund notices or negative balance days, it’s very unlikely that you will be able to secure a loan. Once again, knowledge is power. Most online lenders look at your three most recent months (some require six, especially for seasonal businesses), so if you have negative balances, here are a few painful, but necessary steps you might want to take to produce clean statements.
One last and extremely important note. Sadly, we see more than our fair share of fraudulent bank statements. Doctoring your bank statements is not only a crime, but one that will be found out. One of the last steps every lender takes is to log into your bank accounts and verify that the information you provided was accurate, so you might make it through to the very last step with bad statements, but it simply will not work.
6. Just Because You Can… You know the rest. Online business loans and merchant cash advances are more expensive than traditional loans. While it seems like an oversimplification and a bit patronizing, it’s absolutely imperative that you apply only for what you need and not what’s necessarily offered to you if your application is successful. MCA’s should be seen as a means to an end when it comes to financing and as a stepping stone to procure better business financing down the road. If you are able to comfortably repay a MCA or short-term loan, you will build your credit profile and put yourself in a better position to apply for financing at lower rates through traditional institutions.
7. Outstanding Liens. Businesses that have been around for a few years often have liens that they’ve forgotten about or are completely unaware of. It happens and there’s no need to panic. Old judgments against your company arising from a dispute or even non-payment often linger simply because no one thought to secure a proper release. If you run a business credit report and discover old judgments that have been satisfied, it’s absolutely critical you reach out to the judgment holder to obtain a release and ensure that they file it with the proper authority governing the judgment. If there are outstanding liens that still exist and need to remain, make note of the amount as this will count against you during the underwriting process. And, of course, if you’re able to pay these off prior to applying for the loan, then do so and obtain the release.
8. Read the Documents. Online lending and merchant cash advances are still relatively young despite their popularity. Thus, there are no standards when it comes to the actual documents that you will sign. There’s no such thing as a “boilerplate” loan document so make sure you examine the documents closely. A seasoned and reputable loan broker should align you with a reputable lender but just remember that there are still bad actors in this industry. So it’s still important to be your own advocate and refuse to sign anything that makes you uncomfortable.
Pro Tips: Make sure there are no prepayment penalties should you decide to retire your loan or advance early. And if you are working with a broker, make sure you’re not required to give them any funds directly. Brokers are paid directly by the lenders and shouldn’t add any fees to the process.
9. Forget APR. If you make it far enough to receive an offer from a lender and are comfortable with the payments, don’t focus on the annualized percentage rate of the loan or advance. It will be high. Almost every online lender or MCA company will require either daily or weekly payments that are deducted directly from your bank account. Because you have determined this is your only option for financing, the only thing that matters is whether or not your projections clearly show that you can handle these payments without pushing your bank balances in the red.
10. Use to Build Credit. You’ve made it through. You secured the loan or the cash advance and you’re handling the payments comfortably. If you pay it off early, great! Do so. If not, just make sure you continue to make consistent payments and refuse to take additional funds when offered (and they will offer). Remember, this is the means to an end, not the end of your means! Use this as yet another building block to establish creditworthiness and to someday secure funds to grow your business from a traditional institution. After your loan or advance is fully satisfied, make sure you work with your lender to lift the liens they filed on your company (they will file them) and that you have received verification that all obligations to them have been fully satisfied.