It’s never a good feeling when you are working on a client’s books and see they have a cash flow shortage approaching. In the past, when you saw such a sign, it was easy to refer your client to their local bank, perhaps to pull on an existing line of credit or open a new one.
But, if you’ve read any sort of small business publication as of late, or have had your clients go to these very banks, you know full-well that banks are simply not lending to small businesses right now. In fact, 82% of small business loan applications are getting denied by the big banks.
Why? Post-recession, the increase in government regulation has caused banks to allow less risk in their portfolios and small businesses are inherently riskier than larger ones. As well, banks are businesses too. It costs them just as much to underwrite a $2 million dollar loan as it does a $50,000 loan, so they’ve really stepped away from making smaller loans, as it’s just not profitable for them. But, most small businesses want those smaller loans, which only decreases their chances of finding a bank loan.
Knowing banks are not an option, how are you supposed to advise your clients when you see that cash crunch coming?
Tell them to go online. Since the banks have decreased their lending, alternative, online lenders have popped up to fill the void.
Chances are you’ve heard stories about these alternative lenders, and some of them might not have been great. There are numerous predatory lenders and brokers out there, but there are also many lenders that are helping small businesses get the working capital they need.
However, alternative loans are going to have higher interest rates than bank loans, and that is something your clients need to know out of the gate. But, with the diversity of products, they might end up finding a solution that is a better fit for them. Not to mention, SBA loans can now be secured online, which have interest rates starting at 6%.
Here is a great chart showing the various loan products that can be found online:
The best way for your clients to avoid getting into a loan they can’t afford is to have you involved in the process. You can help them understand the true cost of a loan (as APR is a hard topic for most people to understand), as well as make sure they are taking on the right loan amount and have a healthy debt service ratio.
Alternative lending is a new and complex world. While intimidating, the opportunity it offers is tremendous. Our goal at Fundera is to make the process of finding a loan online as simple as possible. However, we firmly believe the best way for a small business to secure a loan is to have their accountant involved along the way.
Each month, I’ll be contributing to Intuitive Accountant to provide the information you need to help guide your clients along the way. We’ll discuss the cost-benefit analysis, debt service ratios and more.
Next month, we’ll be doing an in-depth exploration of each of the loan products referenced in the chart above. If there is a loan product not included in the chart above that you would like more information on, let us know in the comments below.
Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loansthat matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more.