Traditional small business bank loans are a thing of the past and here's why...


Traditional small business bank loans are a thing of the past and here's why... Roughly 80% of all small business owners who apply for a traditional small business bank loan will be declined. There's roughly 30 million small businesses in this country, so that's a pretty high number of folks who can't access capital through traditional channels. And even if a small business owner is technically bankable, their spouse has to be on the application, their home has to be put up as collateral, the list of documentation needed to apply is absolutely endless, they have to inject 20% - 30% of the total loan amount in cash, and it could take anywhere from 2 to 8 months to get the funding that they are applying for. For example, if someone wanted to borrow $1 million dollars from their bank, most small business owners don't have $200,000 - $300,000 hiding under their mattress to give their bank, just to get a bank loan. Not to mention, most spouses don't want to be on the hook for hundreds of thousands of dollars that they had nothing to do with.

"A bank is a place that will lend you money if you can prove that you don't need it." - Bob Hope

Here is an "average" description (real historical data) of the small businesses who are getting approved through the SBA under $350,000:

SBA Loans $30,000 - $150,000:

  • Average Revenue $346,000. EBITDA $42,000. Liquid credit 175. FICO 711. Years in business 9 years.

  • Median Revenue $600,000. EBITDA $61,000. Liquid credit 176. FICO 713. Years in business 12 years.

SBA Loans $150,000 - $350,000:

  • Average Revenue $867,000. EBITDA $82,000. Liquid credit 177. FICO 713. Years in business 6 years.

  • Median Revenue $1.5MM. EBITDA $114,000. Liquid credit 175. FICO 713. Years in business 10 years.

Fact of the matter is, MOST small business owners do NOT, nor ever will, meet SBA business loan criteria. Not even close!

Trying to get a small business loan from my bank is a nightmare. Are there any non-bank business loan alternatives?

Let's dig a bit deeper. For those who want to go the SBA route, the first step is to confirm you meet the cash flow standards of an SBA lender. This is all just to confirm cash flow:

  • 2016, 2015, 2014 Personal Tax Returns

  • 2016, 2015, 2014 Business Tax Returns

  • Business Debt Schedule - ALL debt in the name of the business. Any credit cards, lines of credit, equipment loans, leases, term loans, etc. must be included.

  • Current P&L - Actual statement and not just the numbers

  • Balance Sheet for 2017 - Actual statement and not just the numbers

  • Current Personal Financial Statement for Each Individual and spouse completed and signed (if married, please include spouses signature also)

  • Complete Copies of any notes to be refinanced

Nuts, right?! And keep in mind, that's just to get the ball rolling! Then, if you pass the cash flow analysis and have waited roughly 2-3 weeks, then you'll need to provide:

  • Bank Statements: Many loan programs require one year of personal and business bank statements to be submitted as part of a loan package.

  • Collateral: Collateral requirements vary greatly, typically your home must be pledged as collateral.

  • Debt schedule and countless other legal docs.

That's the equivalent of getting a root canal and a colonoscopy all on the same day. If you go through the debacle above and pass everything, you can expect to wait 2-8 months to finally get funded. Sounds pleasant, right?

Seriously, who has time for that nonsense? And that's not going to do much good for the small business owner who just had a pipe burst, a machine break, or who needs to quickly hire a new employee, order inventory, or any other quick need for working capital. Not to mention, do you really want a $30,000 debt on the books and an all asset business lien for the next 10-15 years, just to pay off a small marketing campaign from 2017? Bank loans and SBA make NO sense whatsoever for small businesses in need of short term working capital and cash flow financing.

Filling in the Void: Alternative Financing Adds Market Efficiency

Unless small business owners meet the criteria above, people can't compare bank loan rates and terms to "alternative financing small business capital. Which so many people do. Most small business owners like to throw out the statement, "your money is too expensive, my bank loans money at 7%." Well, NOT to you they don't! Whether you want to admit it or not, you're bank isn't ever going to loan you money at 7%, if they were, you wouldn't be reading this. Too many small businesses compare rates and term on bank loan products they don't have a snowballs chance in hell on ever qualifying for.

Small business owners should be more concerned with the ramifications of not having a solid stream of cash flow, instead of the worrying about a lower cost of capital that they'll never qualify for. We are seeing thousands of small business owners literally putting themselves out of business, waiting on bank loans that never materialize. 

Bank loans may make sense in certain situations, but the scope of lending has changed and will continue too. 

All we ask for is a one page application, and 4 months of bank statements. We can underwrite in a few hours and fund sometimes same day.  With the default rate the way that it (30%-40%) and the fact that our criteria is minimal compared to the traditional route, our financing simply makes sense.

Another thing to think about, instead of small business owners thinking about how much the cost of capital is going our route instead of the traditional bank route, they also need to consider what are the opportunities they are missing by waiting for bank loans that most likely will never solidify. We have actually seen business owners pass by millions of dollars worth of opportunities when we could’ve provided the capital, but they were waiting on bank loans that never came through. So in an effort to get better rates, they passed up millions of dollars in potential revenue to wait for a bank loan that never funded. 

We were working with a craft brewery in Texas for a while, but they held out for an SBA loan. We made them multiple offers to fuel their growth, but they insisted the SBA was the way to go, strictly due to cost of capital. So they held out. And held out some more. In fact, it took them over 15 months to finally close on the SBA loan and get funded. All the money they were trying to save by going the bank route; they would up losing on millions of dollars in lost opportunities for those 15 months.

Is the cost of our capital higher than a bank loan or SBA. YES! And for very good reason. But the bottom line is this, the chances of getting a bank loan is slim to none, and even if you meet all the requirements, is it really worth it all? The whole thing makes no sense for your typical small business that needs fast access to reliable capital. Certain situations, bank or SBA loans may make sense. But definitely not for the typical small business owner.