In order to grow your business, capital is critical. While larger businesses might have stock offerings or equity loans from major investors, small businesses often have to rely on loans. A loan can be the key to accelerating business growth – it means a small business owner can buy new equipment that will increase production, hire new employees, or purchase new inventory. However, getting a loan often means your credit will be put under the microscope, which can spell trouble for small business owners trying to get a traditional loan. For small businesses it makes sense to look for a lender that can understand their unique situation. That’s where alternative lenders come in.
Small businesses may have bad marks on their credit due to past problems with liquidity (their ability to meet their short-term liabilities), and that can hurt their chances of obtaining a traditional loan. However, alternative lenders understand that a short-term liquidity challenge should not be extrapolated to assume that the business will become insolvent. For example, smaller businesses have fewer customers, and if one of the customers is late paying their invoice, this can greatly impact a small business’ ability to pay their bills and meet other financial commitments. This is just one of the nuances of credit decisions that are unique to small businesses and that alternative lenders like IOU Financial handle on a regular basis.
What are credit decisions based on?
A business’s credit is based on a multitude of factors including: the length of time in business, the amount of debt a company has relative to its credit and to its cash flow, and payment history. However, sometimes a new business has trouble getting any credit, and having no credit available can sometimes be looked at like having maxed out your credit – not good. Gaining new credit through something like an alternative loan can actually be a positive for a credit score. By building good credit, as you make payments on that credit and pay the balance down, your company’s credit rating will improve. A better credit rating means a company is more likely to gain access to new credit in the future, and it also impacts the interest rate they will pay on that credit. A loan to make improvements can also help companies increase revenue, another way a business can improve its credit.
What do alternative lenders base their decisions on?
Alternative lenders like IOU Financial know that credit is important, but it is just one chapter of the story. There are things beyond just credit score that we look at. We want to see the whole picture of your small business: Are you generating revenue? Is your revenue increasing? Where does your revenue fall in line with your expenses? What are your day-to-day bank deposits? For a business to be financially healthy the balance of assets, liabilities, and equity should be analyzed as well as an assessment of solvency and liquidity. In sum, you need to have the cash flow to pay your bills and make payments on the potential business loan. Of course, we will also see what the loan will be used for and if it will decrease expenses and increase revenues. A holistic assessment is necessary.
Want to see what alternative lending can do for you? Talk to an IOU Financial Small Business Loan Consultant and learn about the ways IOU Financial can help you get the capital you need.