“Money makes the world go ‘round…” No one understands that line from the musical Cabaret more than small business owners and entrepreneurs. You need money to start, run, and grow a business.
Traditionally, money has been hard for small business owners to get. But it’s been a decade since the Great Recession began, and the economy is in a much better place today. But does that mean it’s easier for business owners to get financing?
To find out more about the state of small business lending, we talked to Brock Blake, the CEO and founder of Lendio, a lending marketplace, to get his insights.
Fundbox: In general, how would you rate the lending environment for small businesses today?
BB: There’s been a lot of talk of doom and gloom, but it’s actually the opposite. There are lots of reason to be optimistic going into 2018. The metrics we see are positive. Small businesses are healthy, growing and repaying their loans. They’re balancing providing great customer experience and focusing on delivering what consumers demand while managing the profitability of their businesses.
Businesses are more credit-worthy these days—and we’re seeing low default rates among those seeking capital. And there’s also a lot of innovation on the lender side. There are great lenders, including newer players, online lenders, and traditional banks all innovating.
Small businesses have more options today, there are more loan products for different use cases as lenders focus on specific areas businesses are in.
From a small business perspective, there’s never been a better time to get access to capital. There are lots of lenders, more options, all competing to gain access to the customer.
Have advances in technology, like cloud computing, made a difference?
BB: Yes. Underwriters can look at data to access creditworthiness. Lenders are better able to customize their products. They’re getting better at knowing certain industries, allowing lenders to focus on the wheelhouse of the customers they want to underwrite. If they stick to their sweet-spot, there’s a lot of promise.
There’s an ecosystem of credit and loan opportunities for business owners available today. A landscape of products. But business owners need to be educated about them.
BB: I agree. Business owners’ perceptions are a bank is a bank is a bank. If anyone is going to give me a loan it’s my bank and [they apply] and get declined. They don’t realize that bank only does one type of business loan. They think, “I got declined, I’ll get declined from everyone.” They don’t realize all the different types of funding products available. It’s overwhelming.
But today, there’s an “always on” application. For instance, in QuickBooks, a business owner can get an alert from them that they’re prequalified [for a loan]. “Click here, get $20,000.” The business owner may not be seeking a loan, but they think, “if I had the money…that’s interesting, I’m going to pursue it.”
Money is being pushed, not pulled today. No one wants to apply for a loan and be declined. So, it’s [better] for the entrepreneur and less risky for the lender.
Are more business owners seeking capital?
BB: We see volume and demand continuing to increase.
Are there specific types of businesses/industries currently looking for funding?
BB: Retailers, in general, have more working capital needs. Restaurants too, as well as consumer-facing companies and seasonal businesses. There’s more inconsistency around these businesses. But, small businesses across the board need money. On average, businesses need access to capital every three quarters.
Do small businesses have to be more in tune with being global companies?
BB: The internet changed everything. Just selling locally is not enough. Small businesses need to embrace digital marketing. They have to reach new audiences in ways that are highly compelling.
What are the most common reasons for SMBs to take out a loan? Our research shows there are $825 billion in unpaid invoices. And their needs are shifting. Most businesses are in need of cash flow management. Now, they’re less worried about triaging. It’s more about the future—about hiring, digital marketing, etc.
BB: In 2018, businesses seeking capital are more forward-looking, rather than backward-looking. They’re looking to generate opportunity. More are taking out a loan to hire, to expand, to open new channels, to increase marketing, to be more successful.
What are some common misconceptions small business owners have about getting a loan?
BB: They think they’re going to lose their house if they can’t pay off the loan. The industry has tried to educate them, but they don’t know what the personal guarantee means. Lenders are looking at personal credit scores. If they default, their personal credit will be affected, and there is a collection process, but that doesn’t include taking your house.
What’s the truth about startups? Do they have any chance of getting funded?
BB: Startup money comes from friends, family and credit cards. Lenders need to see cash flow and most startups don’t have that.
People fear credit cards, but many businesses only exist because they’ve leveraged credit cards. Credit card advances are a good option. Look for the ones that are interest-free with 0 APR for the 1st year. It’s great money; you can get $10,000-$15,000, paying no interest for a year. It gives you runway.
But startups won’t get funding if they have bad credit. So, don’t overleverage yourself.
What criteria do lending institutions (traditional and non-traditional) look for?
BB: The three C’s: credit score, cash flow and collateral. You used to need all three C’s to get a loan, now you only need one of them to get funds. The more C’s you have, the better the rate. If you have two or three, you’ll get a medium capital rate; if you only have one, you’ll pay a higher rate.
Traditional lenders are not looking to lend to businesses with only one of the three C’s. Some traditional lenders will just look at your credit score. Others have a “hard threshold” about how long you’ve been in business. They want to see evidence of cash flow, often for a minimum of one year.
What are most popular types of funding small businesses request?
BB: A line of credit is by far the most popular. It’s what business owners know. They can draw on it when they want to, for what they want. They associate it with flexibility. We put out a marketing piece, testing one product vs. another. The line of credit got a 3-5 times bigger response.
Are business owners smarter these days?
BB: Yes, but I’m not sure there’s data to back it up. We celebrate entrepreneurship in the U.S. more than we ever have. Small business is the backbone of the economy.
Everyone—the government, chambers of commerce, entrepreneurship centers, organizations—are all asking how we can help small businesses be successful, and reduce the failure rate. How can we help small businesses get off the ground and start running? Our culture is to believe in entrepreneurs. We want entrepreneurs to win.
About Brock Blake:
Brock Blake is the Founder and CEO of Lendio, an online service that helps businesses find the right small business loan quickly. Lendio works by matching qualified small business owners with active banks, credit unions, and other lending sources across the country.