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The 5 Main Reasons Banks Turn Down Small Business Owners for Loans

The bank said “NO!” You were counting on that small business loan to help your business grow. If it makes you feel any better, you’re not alone.

Over the last few years, large banks have been reducing the amount of loans that they’re issuing to small businesses. The Wall Street Journal reports that it may be because of, “Weak demand, tighter lending standards and high costs have put a lid on small business borrowing” following the 2008 economic crisis and it’s taken the last ten years to correct that mindset. Bottom line – most banks aren’t small business friendly, even though they advertise they are.

However, getting rejected is never fun, even if the circumstances are out of your control. That’s why you should know exactly why your loan was rejected in the first place so that you can make sure that it never happens again. In most cases, a trusted business advisor who understands small businesses and banking is a necessary part of your team.

Sometimes a bank will share these details, but if not, I find that it’s typically for one or more of the following five reasons:

  1. Time in business and limited collateral
  2. Weak cash flow
  3. Bad credit
  4. Lack of preparation
  5. Outside conditions

Time in business and limited collateral

For new small business owners, obtaining a bank loan may seem like one of the best ways to jump- start your business, or at least get you through your first trying year. Loans for those situations do exist. But, you are probably not going to find them at your local bank. If you’re looking for a traditional simple interest business loan with a monthly payment you’re going to need to be in business for at least two years.

You may even have difficulty qualifying for this type of loan until you’ve been operating for at least three years. The reason? Traditional loans require two full years of tax returns to prove consistent gross and net profits. Additionally, small businesses that are just starting out often don’t have the collateral, such as equipment or real estate, required if your business ever defaults on the loan.

You may have to look for alternative sources of funding, such as peer-to-peer lenders, crowdfunding, or online merchants, if you just started your business. If your credit is good, these types of loans will be no problem. On the other hand, if your credit is a challenge, these non-traditional loans can be very, very expensive. As for collateral, if necessary, you can use personal assists like your home or vehicle.

Weak cash flow

Banks are very concerned that businesses have enough cash flow to make monthly loan payments in addition to covering their payroll, inventory, rent and other expenses. Unfortunately, many startups and small businesses struggle to keep enough money in their bank accounts even when they’re profitable, often because they have to pay 3rd-party suppliers upfront before they get paid for their product or service.

By creating and sticking to a budget, small business owners will have a better idea on how much cash is coming and going through your business operations. If you notice that there is a weak cash flow then you need to cut expenses and find ways to bring-in some extra so that banks won’t reject your application. Most small business owners make the mistake of not asking for help in this area.

Bad Credit

Credit history is one of the first things that lenders will review when going over a business loan application. A good credit score proves that the business owner has properly managed both of their personal and business finances by avoiding bankruptcy and making all of their payments on-time.

A poor credit score, however, can make lenders wary since it demonstrates that the individual can not make well-informed financial decisions and are unable to meet the financial obligations that are included in the loan agreement. This is even the number one reason why payment processors will reject you and your company from even accepting payments.

The good news is that you can repair your low credit score by paying your bills on-time, getting your credit card balances under control (not cancelling your cards) and repairing any mistakes that appear on credit reports. Keep in mind, bad credit on either the business owner or the business can impact the business getting a loan.

Lack of preparation

Many businesses simply aren’t savvy about the application process and believe they can walk into a bank, fill out an application and get approved for a loan. When your banker says, “no, you just don’t qualify”, he may well be saying 1) you’re not structure properly, 2) you have no direction or plan, or 3) you haven’t developed the right company infrastructure.

Prior to applying for a bank loan, the Small Business Administration suggests that you have a written business plan, financial statements or projections, personal and business credit reports, tax returns, and bank statements. Also included should be copies of legal documents, which include articles of incorporation, contracts, leases, or any licenses and permits that you need for your business to operate.

Outside conditions

What if you have a solid credit score, strong cash flow, collateral and have prepared everything you need for loan, but are still turned down? It could be no fault of your own. It may just be outside conditions that are out of your control.

Outside influences are always considered prior to a loan approval or decline. They can include

industry experience (do you have the work background to manage your own business), a business’s location, local or regional economic trends, competitors.

Furthermore, there are local, state, and federal ordinances, along with factors like, such as local climate conditions, that could influence an applicant’s approval or denial. It could even be as simple as your bank has too many loans in your industry.

Banks are just more cautious since the 2008 recession, in part because of regulations about lending money to businesses that are considered risks. Unfortunately, this includes small businesses since they don’t have the proven track record of established or larger businesses.

How We Can Help

No one’s perfect, but that shouldn’t stop you from getting the capital you need. That’s why Banks & Associates works with our network of lenders to get you approved for a loan despite not having a perfect credit score, or being a startup lacking a strong cash flow. Call our team today to get connected with an advisor who can help you get approved for a loan.

Are Merchant Cash Advance Loans Getting Small Businesses in Hot Water or An Ends to a Mean

Government agencies, banks and consumer advocacy groups have been trying to find ways to clamp down on the predatory nature and proliferation of payday and title loan businesses. However, hiding in the shadows is another growing industry that is taking advantage of small businesses across the U.S. They are companies offering merchant cash advance loans and are cleverly disguised to skirt the usury laws.

What are Merchant Cash Advances?

The merchant cash advance loan business is a new industry that developed during the recession of 2008 when, because the bank lending criteria became so tight, very few small businesses could qualify for traditional loans. However, these same small businesses still needed the occasional short-term cash infusion to maintain business operations.

Modeled after the payday or title loan advances, merchant cash advance loans use a business’ receivables as collateral. The receivables can be the daily credit card transactions or invoices to clients. To pay the loan back, a percentage is taken directly from the business’s checking account on a daily basis.

Credit underwriting for these companies will monitor the borrower’s bank statement to decide how much money they can take out of the borrower’s account based upon the cash flow, to pay themselves back. While many of the lenders state that there are no “hidden fees,” the pricing of these loans is never clear and usually based on very high fees. The fees are not called interest, so as not to look like a loan and to avoid banking laws.

While each of the merchant cash advance lenders competes heavily for business, most have similar terms and interest rates. To qualify, many of these lenders also force businesses to switch to their own credit card processing service, which usually charges a higher credit card processing fee than the more common processors.

The Real Cost of Merchant Cash Advances

In one instance, the Woodstock Institute, a nonprofit research organization, analyzed a number of merchant cash advances and found that borrowers often end up paying effective interest rates that can soar into the triple-digit percentages.

In one case, a provider gave an advance of nearly $24,000 to a business, charging more than $1,100 in fees for things like issuing the advance, risk assessment and processing. To collect its payments, it deducted $499 a day from the business’ sales for 76 days.

In total, the borrower paid nearly $37,500, paying an effective interest rate of about 346%

When Small Business Borrowers Can’t Make Payments

If businesses miss a payment or can’t keep up with the payments, things can go awry quickly. The

automatic deductions will continue as long as there is money for the cash advance company to withdraw. In many cases, the loan company has the right to call the loan all due and take all of the money out of the account the next time funds are available.

Many business owners take out new advances in order to pay off outstanding balances on previous advances, plunging them into a cycle of debt. Unfortunately, many of those businesses are forced to close their doors for good.

The Need for Regulation

The problem with advances is features normally regulated by the government – fees, penalties and rates, aren’t subject to any oversight. In addition, the terms of the advance aren’t always clearly outlined and the total amount owed, including the hefty fees and charges that are tacked on top of the initial advance aren’t usually expressed as an annual percentage rate.

Another problem small businesses face is after a business owner takes out one advance, they are often bombarded with offers for more. It seems the industry players are so closely related, they almost conspire to get a small business owner in trouble.

Using Merchant Advance Loan Prudently

There are times a business has no other choice but to go down this path. And while expensive, they can make sense, if the cash flow is available to pay back quickly. Some reasons to choose this method might include:

  1. Payments need to be made to avoid damaging credit but the timing of funds owed to you are delayed;
  2. Supplies and materials are needed to fill a customer order and no other credit facility is in place;
  3. Equipment is needed immediately and there is a clear strategy to permanently finance the equipment;
  4. Your personal credit is damaged and there is simply no other choice.

In many cases, the need for speed is the only answer. Planning and preparation usually mitigates the need, but if you find yourself in the position for this type loan, seek the advice of those knowledgeable.

What’s a Better Alternative?

An alternative to borrowing money from merchant cash advance lenders may be to apply for a loan guaranteed by the US Small Business Administration. The drawback for a company needing immediate cash is that the application process is like a traditional bank loan – not very fast and requires the development and approval of a business plan, which also takes time to write. If your loan request involves the acquisition of a business or construction, timelines lengthen.

Fortunately our team at Banks & Associates can help finding financing solutions to even your most difficult money problems. We pride ourselves in providing our clients with fast financing with flexible terms that ensures you can make payments without fear of having to close your business.

How to improve your FICO score in 5 steps

Our FICO scores impact our ability to borrow both as a business and as individuals. Traditional banks use them as the basis of many of their lending decisions, and a bad score can mean rejection before the ink has dried on the application. This is the reason so many of us worry about our scores. If you’ve had issues, are you screwed? The answer depends on each individual, but in many cases, with time and work, there is hope through a few simple steps.

Get your full credit report

The first step to fixing a bad score is knowing what that score is. The easiest way to do this is through a consumer credit reporting company like Experian. These companies monitor and report scores back to people to ensure that their identities, credit, and financial information are secure.

Contrary to popular belief checking your score will not negatively impact a score, as long as it done personally. These are considered a soft inquiry, which doesn’t affect credit scores. Checking your score while applying for credit can have an impact on a score, and is considered a hard inquiry. This is why it is better to check a score before making an attempt at acquiring credit.

Find & resolve inaccuracies

A bad score is often caused by inaccuracies. These simple mistakes, such as an incorrect address, a misspelled name, or wrong birthdate, can be indicative of identity theft. Finding these mistakes, and evidence of theft can help solve a bad score but do take time to resolve.

While it is possible to dispute inaccuracies online they are often denied. In order to ensure a response from the credit reporting company print out the report, highlight the inaccuracies, and write a series of simple letters with the collected evidence to the reporting agency.

In the worst case scenario where they continue to deny the reported inaccuracies, you can then find legal aid from someone who specializes in Fair Credit Reporting Act cases. The easiest way to find one is on the National Association of Consumer Advocates website.

Balancing credit usage

The first inclination once a bad score is discovered might be to limit the items that impact credit scores, most notably credit cards. However, closing all unused cards is a bad idea. The general rule is to have more credit available than is actually used. So, keep a couple of cards open.

It is also important to have a few different types of credit, not just credit cards. Mortgages and private loans affect credit scores just as much as cards do, and are less likely to be affected by identity theft. In addition, having a variety of credit types reporting will help to improve your overall score.

Pay on time, every time

Credit scores change based on how we treat the credit we have taken out. If there is a constant case of neglect towards payments the score will almost always be bad. Paying at least the minimum ensures that there is a history of positive reports. 6 months of on time, minimum payments can have an immediate impact on a report, make a noticeable difference in your overall score.

Repeat every six months.

It may seem that once a successful score is achieved that the challenge is over. But, much like physical health, credit needs to be monitored. It is not a once and done job. Your credit report is always evolving, changing with each major decision you make in life. The choice to buy a new car, a home, or to go on a trip can make or break a credit score. Identity theft is always a threat, and even the smallest credit card purchases can pile up. So, in order to keep a good credit score, repeat these steps and once every six months request an updated credit score.

But what if you need financing now, despite a lower score?

While loan officers at traditional banks are often handcuffed with stringent credit requirements, not all lenders are limited by these same restrictions. Different lenders, as well as different types of financing, will expect different minimum credit scores. And some types of financing won’t even check your credit score at all. So if you need financing now despite having a lower credit score, our team can help. Give us a call and we can talk through immediate financing options, as well as steps to help improve your credit over the long term.

4 Common Financial Mistakes Every Small Business Owner Should Avoid

Most entrepreneurs begin their business with a “good idea” without much thought to manage the administrative tasks that make them successful and allow them to grow. Every entrepreneur and business owner will make a few financial mistakes during their journey. Those who aren’t savvy in accounting often overlook the need to brush up on their financial IQ. Truth is, these little financial errors can lead to some serious cash flow problems if you aren’t careful. Here are four financial mistakes you can easily avoid so you can protect your bottom line

Late payments

Nobody is fond of paying bills. We tend to put them off until the last minute for short-lived peace of mind. This applies to all business owners when it comes to both your account payables and receivables.

When billing your clients, it’s common to give them an extended window of time to make

payments so you can foster more sales. While your clients may appreciate the flexibility this can seriously cripple your cash flow. Most assume they have 30 days to pay an invoice, but we generally suggest giving your clients no longer than 14 days to pay an invoice, but payment on receipt is sometimes necessary to avoid cash shortages. If you’re providing quality goods and services they should have no problem paying you within this time window.

When it comes to paying your own bills, it’s important to follow the same principles above. This is especially the case if you’re operating off borrowed money. Paying an invoice late may result in a few unhappy emails, but when it comes to paying off your debts you need to always be on time. Payments to the bank or mortgage company are critical. Even one missed payment can severely harm your credit score.

The best way to stay on top of these is to use an online payments solution that offers online invoicing and accounting features. Today’s accounting programs have these features. Ask your accountant to help you select the app that will allow you to grow and provide a foundation for business growth. With the right app, all of your bills are organized and can be accessed anywhere at anytime.

Forgetting to have an emergency fund

Most start up new businesses on a shoestring and every successful entrepreneur will probably tell you that hindsight is 20/20 and foresight is … well you just never know what’s going to happen. Many small business people never think the “worst could happen”. Every business will have to pivot and there will always be unexpected hurdles. That being said, it’s absolutely imperative that you have your contingency plan, especially when it comes to finances. I recommend that every business owner has a three-month emergency fund at least.

You should start putting money away into your emergency fund as soon as the cash comes in. No matter the size of your business you should learn the art of bootstrapping and staying lean. The more money you put away, the more you’ll force yourself to get by with what you have. The majority of startups fail due to the lack of or misuse of capital. One cash management vehicle that supplements an emergency fund is a line of credit with your bank. It takes discipline to manage the cash you have available, but that’s another topic. Having an emergency fund gives you a bit more runway when disaster strikes.

Failing to separate business funds from personal funds

This is one of the most common and dangerous pitfalls in small businesses. Small business owners often put their lives on the line for their business, literally. This is a big no-no. When starting a business it’s important to immediately separate your personal finances from your business finances. If you’re like any other entrepreneur it’s going to take more than one go to be successful. That being said, you definitely don’t want a failed business to tarnish your financial reputation. This principal is absolute – DON’T MIX BUSINESS AND PERSONAL ASSETS.

Start by opening up a business bank account and apply for a business credit card to keep track of expenses. Make sure you’re only using your business credit card for business expenses and

vice a versa. Failing to separate the two can also lead to complications around balancing accounts, filing taxes, measuring profits and even setting clear financial goals. Avoid mixing these expenses.

Spending too much time on non-cash-generating activities

It’s a given that you most likely won’t see an ROI on every activity you do when running a business. That being said, it’s important to distinguish which ones have the highest chance of eventually generating some cash flow. When it comes to time tracking and time management, it’s important to pay close attention to your productivity levels.

Everyone has 24 hours in a day, some decide to work smarter than others and that’s why they become successful. Know that time is your most valuable asset and treat it as such. Remember, it’s okay to say no or to turn down meetings that you know provide little to no value for your business. There’s no need to take or be present on every phone call either. Being able to identify what brings true and tangible value to your business is a key to success.

Granted, there are tasks that have to be done in order to help the business thrive – long term and short term. Good time management includes setting aside planning time and deciding what tasks can be delegated. Most small business owners make the mistake of believing they can “do it” better than anyone else. Learn to delegate.

Try your best to follow the 80/20 rule. There are likely three to four activities in your business that generate the most cash. Once you identify these activities, create a habit of spending 80 percent of your time doing these tasks and save the rest of your time for other miscellaneous jobs. If you’re able to get really disciplined around this strategy, it will surely pay off.

It takes years of practice to improve your financial literacy. Although most lessons in finance are learned the hard way, it’s important to learn them nonetheless. Take note of these four common financial mistakes and do your best to avoid them.

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Your SMB needs $$$. You need smart solutions.

At every business stage—starting out, sustaining or growing—one requirement is a constant: money.

And even though it doesn’t always seem so, there are more financing options available to small and mid-size businesses and entrepreneurs than ever.

Like the adage about working smarter not harder, the secret is in being smarter about financing.

But the smart choice may not be the easy or obvious one. The first step is identifying your need and timing, so financing solutions can be matched most effectively.

Different situations are better served by different solutions.

EARLY ON

If you’re either starting a business up or still in “new business” mode, most traditional banks aren’t very interested in fronting your capital—it’s just too risky for their blood.

But there’s a caveat: the Small Business Administration. The SBA doesn’t make loans; it guarantees them. But the SBA was created to help entrepreneurs start and grow new businesses, and there are many banks that leverage the SBA guarantee in order to serve SMBs just like you.

In addition to the SBA, there are other guaranteed lending programs specifically structured for launching or expanding small businesses: the USDA Rural Development program and Farm Service Agency are a couple that target rural and agricultural areas.

The key to any bank-related financing is always the quality of your business and financial planning. Credit analysts couldn’t care less about entrepreneurial passion; they want to see numbers that make sense. Failing to properly plan your business is absolutely asking for a rejection of your loan application.

CRISIS OR CASH CRUNCH

At some point, every business hits an unexpected and unpredictable hurdle, from machinery breakdowns to market turndowns to supplier shutdowns. Typically, such crises never occur when a business is flush with cash; it’s usually just the opposite.

When an emergency arises at the worst possible time, quick access to financing can be critical. There are two types of borrowing that can help in such a situation: term loans and lines of credit.

A term loan is a traditional arrangement where you borrow X amount of money and pay it back over Y number of months. The SBA is an excellent resource for operating businesses facing a challenge. But since you have to borrow the amount of a term loan all at once, you may wind up paying interest on money that you don’t need.

Lines of credit are more flexible, because although you agree to borrow X amount of money over time, you only access or “draw” out money in increments as you need it. If you need all the money, it’s there, but if you only need half of it, that’s all you pay interest on.

The SBA offers a Capline product that is designed specifically for small businesses that may need periodic access to additional financing.

FINANCING GROWTH

If you’re successful, your business will grow — but many SMBs are unprepared for the cost of growth. Expanding your business means expanding operations: hiring more people, turning more inventory, buying new equipment, adding new technology or opening a new location.

Most growing businesses are again confronted with financing needs that are both cost-effective and practical. Longer-term loans are usually the most attractive for these purposes.

SBA and other guaranteed loans are ideal solutions for large growth-related expenses, especially if there are large inventory assets, major equipment or commercial real estate involved.

The bottom line in SMB financing is, do your homework, understand your options, and make sure you speak “bank” when preparing your application and supporting documentation. Good luck in your business ventures!

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Who’s Your CFO?

More and more SMBs are having success with outsourcing this key position

For most small businesses, there are usually only two answers to the question.

  1. You (the owner) are the CFO (sort of), or
  2. There is no CFO (often expressed as, we don’t need a CFO)

That second answer is indicative of a management trap mindset of only doing “what is necessary to get it done.”  That typically means longer hours since the business day is spent taking care of customers, getting the work finished and tending to front line employees.  One day ends late and the next starts early, leaving little time for planning, budgeting developing systems necessary to grow the business, much less overseeing the accounting function.

Just what is a CFO?  Most small businesses first think more about a Controller who is responsible responsible for the accounting operations of the company to include financial reports, maintenance of adequate accounting records, and a comprehensive set of controls and budgets to ensure that reported results comply with generally accepted accounting principles.

Controllers complete tasks — CFOs compose planning. And as with most everything else, failing to plan on financial strategy often equates to planning to fail.

Strategy Matters

The chief financial officer develops a financial and operational strategy, devises metrics tied to that strategy, and supervises the monitoring of control systems designed to preserve company assets and report accurate financial results. At the end of the day, the CFO is accountable for the administrative, financial, and risk management operations of the company.   

In the small business environment, the position becomes broader still, because routine systems are often nonexistent or in great need of refinement. Somebody has to establish and communicate policy while also developing rudimentary procedures to deliver consistent products or services. Since payroll is often one of a company’s largest costs, human resource responsibilities are assigned to the small business CFO.

Trusted Advisor

Structured most effectively, the CFO position often includes Controller, Human Resources, Risk Management, Public Relations and overall Administrative Management, allowing the business owner to focus on customers, products and growth. Essentially, the position ought to function as a trusted strategic advisor to the business owner.

The successful chief financial officer is a degreed accountant with a Certified Public Accountant or Certified Management Accountant designation. Firsthand experience working with small business is critical.  Most with “big business” experience do not understand the entrepreneurial mindset of the small business owner.  Communication skills, both written and oral are essential.

Affordable Solution

Sadly, most small to medium-size business simply can’t afford to add this position to their payroll, even while experiencing rapid growth and upside potential for sustained growth.  The beauty of outsourcing is its scale-ability and affordability: CFO engagements can be customized to meet organizational needs and maintain operational budgets.

An assessment of company plans and objectives can result in an overall long-term plan that can affordably produce positive, demonstrative results for the business. Modern technology makes it much easier for an outsourced CFO to work remotely, making the best use of allocated hours. Skype and screen sharing applications (like GoToMeeting) make staff training and review efficient and time saving.  

Some typical responsibilities that can be outsourced to an experienced small business CFO include: