The Truth About Business Loans
Business Loans – Over the past decade if you needed to borrow $20,000, $50,000 or even $100,000 to cover costs for inventory, buy new equipment, or to expand your business – the banks were eager to lend out business loans.
Today things have changed. And if you are lucky enough to find a sympathetic loan officer at your bank, you could spend weeks or even months waiting for an answer about the status of business loans. At best, you stand a 50/50 chance of getting the money you need.
The truth is, banks have been scared stiff by the economic crisis and have made minimizing credit losses the top priority. Because business loans typically carry higher risk than larger commercial loans, banks understandably have pulled back.
Banks find it extremely challenging to underwrite small business loans, primarily because small business financial reports are typically not standardized, and because the business owners’ personal and financial assets are often comingled. And what banks don’t tell you before you start a long business loan application process, is that they really focus on 3 major items: credit score, cash flow, and assets.
It doesn’t matter if your books are in the black, your business is the pillar of your community, or even if you just invented the cure for the common cold. Unless you’ve already got great cash flow, a stellar credit record along with additional valuable personal assets, you’re likely to remain on the outside looking in to obtain business loans.
Two of the main things that matter are the credit history and assets of the majority stakeholder, aka probably you and/or family member or business associate. Why? Because they want to know who can personally guarantee business loans and satisfy the obligations if your business can’t.
For the same reason, banks want access to a guarantor’s prize assets (cash, securities, real estate, etc.) as security for providing business loans. That’s so the bank can get paid if there is a default on the business loan. In that event, your personal assets may be seized to cover any shortfall. This means, if you have insufficient personal assets, you’ll struggle to obtain business loans.
Most traditional business financing sources (bank business loans, credit cards and lines of credit) require a personal guarantee, which means your personal credit will likely be impacted if you are unable to pay your obligations in a timely manner. Credit scores may be impacted with the three main credit bureaus for several years.
A late business credit card or line of credit payment will not only affect your personal credit score, but will likely skyrocket your APR upwards toward 30% (until the balance is paid in full).
A credit score drop of 30-50 points could significantly increase the cost of getting a mortgage … or worse, prevent you from getting one.
Defaulting on business loans where you have signed personally can jeopardize your most valuable personal assets. Many business owners have seen their personal credit scores drop by 50 to 100 points since the recent financial crisis, dramatically decreasing their chances of getting financing and any further business loans. Thus business owners must be cautious of these factors to be eligible to get business loans, and should consider alternative financing sources.