THE FINTECH PARADOX IN ONLINE BUSINESS LENDING

Technology is meant to be a productivity enabler whatever industry it serves.  The media and investment bankers are so keen on nicknames that they cannot help from creating neologisms to define new sectors or industries. A technology driven sector has to be named SOMETHING-TECH. Playing with words usually helps simplify complex concepts, until it just delivers the opposite, creates bad publicity and counter-productivity.

Most of the time, the INDUSTRY+TECH association conveys a positive connotation. Some companies called themselves likewise. Chemtech International, for example, is a global solutions provider for the manufacturing needs of various industries. Autotech defines various services to the car owner or industry, whether it is tuning, or innovative solutions to the auto industry. However, type Fintech and you will learn that it refers to “companies that use technologies and innovation in order to compete in the marketplace of traditional financial institutions in the delivery of financial services”.   With Finance, it is therefore different, and to make matters worse, Fintech is also referred as “Alternative Finance”. This stigmatizes an arrogance that is hard for banks to tolerate.

There is a good reason for banks to dislike Fintech.  It is the media and investment bankers banging the news on how much cooler and smarter they are at a time when high IPO valuations were needed, while banks were still trading below book value. Fintech’s debuts enjoyed being portrayed as leaner and smarter while banks were and often still are referred as dinosaurs, slow to move and improve service through innovation. Fintech companies and banks started off on the wrong foot; the media loved it and made the Fintech into the new alternative to legacy finance, de facto a business threat for banks.

The term “FinTech Lenders” was also a play to bring TECH multiples to online lenders who leveraged technology to automate many of the labor intensive repetitive processes endured by the traditional lending process. The term “alternative lending” was brought out as a way to label and define something that wasn’t traditional and wasn’t done through traditional sources (ie: Banks). After all – everyone loves newly created words defining disruptive technologies with the thought of abolishing old and tired processes full of bureaucratic rules. While the term “Fintech” may help people to understand the industry segment of interest or a specific vertical within the industry, it should not be used to primarily define lenders who leverage technology in a new and improved way.

The paradox of all this: Fintech offers innovative solutions to legacy financial institutions but its names says something else. Also, banks being so glacial early on, Fintech may have had no other chance but to try their technology for themselves, enforcing the alternative force within them! With a few years in business, some Fintech have been able to demonstrate the need for their product by generating strong demand. Small business online lending is a proven case with billions of dollars of loans made since the credit crisis.

However, not all Fintech business models have yet matured into profitability, key to the definition of success. A structural element of future success for new entrants resides in their ability to access cheaper funding and quality customers. Who can offer these things?  With that in mind, Banks, especially small ones, should feel confident they can monetize their position to bring down their cost of innovation.  By working with innovative companies in financial technology, they can quickly benefit from new and very cost efficient ways to grow revenues. Online lending could be the first expertise to explore in order to welcome small business back and help them grow.

It is true that technology has enabled new entrants to offer innovative services not available at banks, either as a product offering or at a more competitive price.  It is also true that banks have been slow at embracing technology as a growth engine, mostly due to lack of capital to fund innovation. This is especially the case for smaller banks who tend to lack financial and human capital to invest heavily in R&D and innovate. Large banks with deep pockets have found ways to either build or partner and grow their presence in areas where technology offer a clear competitive edge. Large banks have in fact recognized the win-win rationale for partnering with Fintech, an opportunity also open to small banks. Large banks love Fintech because they can afford it. Small banks can as well.

In the case of small business lending, these new online lenders saw a void left by banks in micro-lending (below $150,000 uncollateralized loans) and used technology to reduce underwriting cost accordingly. Online lenders did not actually steal market share from banks in micro lending. Instead, they offered an economical solution to underwrite small loans and managed to fill a gap left by banks.

How will the paradox divide disappear between banks and Fintech Alternative Lenders?  It will dissipate with the online lender taking time to educate banks about their efficient loan platforms and how they can help banks reach new customers, develop new funding sources and grow revenues, especially non-recourse fee income.  Banks should also be curious and consult with online lenders to better define how they can benefit from their technology and expertise in lending small.

Online Lending could be merely defined as – technology enabled lending through a secure website and internet based process. It doesn’t really stop there. Many “online lending” platforms are little more than a pretty form fill website application. The real battle is won (or lost) on the battlefield of cost-to-produce.

What happens after a business loan application is submitted online?

  • Processing workflows
  • Multi-database connectivity via API’s
  • Underwriting processes including risk scoring
  • Anti-fraud detection processes
  • Efficient client interactions
  • Comprehensive and effective post loan funding servicing
  • Post loan funding automated surveillance

This is where the “cost” rubber meets the road.

The total cost of the customer acquisition, headcount and operations to support the online lending operation.

Many online lenders require hundreds of employees behind the scenes to run their “automated processes”. Applications processed per employee, funded units per employee, total cost to produce in basis points. These are traditional metrics that hold true for traditional lenders and online lenders alike.

Now in analyzing these metrics and using units instead of dollars, allows to level the playing field from traditional lenders with 7 figure average loan sizes to online lenders with 5 figure average loan sizes. Profitable online lenders will be the ones who have shared their technology with small banks, and by doing so, help solve the circle quadrature: through partnerships with banks, provide small business with no collateral capital to grow.  An online lender who has been working tirelessly for years optimizing its processes, risk scores, data aggregation processes, headcount metrics and servicing techniques is a great match for any bank that genuinely seeks to lead its local business community towards growth and prosperity.

Fintech is good for banks who can see and exploit the opportunity. In fact, banks who take the lead in partnering with online lenders are the ones who can ensure that online lending becomes mainstream for very small business in North America.

Your Small Business Saturday Attack Plan

Thousands of small business owners across the country participated in Small Business Saturday, an annual event held on the first Saturday after Thanksgiving. Sponsored by American Express, it is intended to bring awareness to small businesses, and encourage patrons to skip big box retailers and shop small to support their local communities.

Small Business Saturday helped many companies attract new customers as well as potential leads. Instead of waiting for next Thanksgiving, business owners should act now to continue momentum into the holiday season and keep clients loyal throughout the entire year. Utilizing marketing emails, exclusive discounts, and “shop small” events are good strategies to stay in touch with new and potential customers.

Emails

An efficient, yet inexpensive way to communicate with your customers is through marketing emails. Sending marketing materials through the mail can be expensive, but with a little effort, you can send emails free or at a low cost. On Small Business Saturday, you likely urged your business’ patrons to sign up for email lists, and now is the time to utilize that list to reach out to them.

We recommend investing in a customer relationship management system (CRM), which will help you manage your client information, and send personalized emails with your customers’ contact information, in addition to recommendations based on their shopping history.

Many CRM programs offer A/B testing, which allows business owners to send two different marketing campaigns, and evaluate which was more popular based on clicks and purchase patterns.

When sending emails, remember that individuals are bombarded by hundreds of emails daily, so make your headlines catchy, funny, and enticing to open!

Exclusive Deals and Discounts

The reason that so many customers frequent local businesses during Small Business Saturday is because they are offered discounts and freebies. Business owners need to remember that discounts can, and should, be used throughout the year to incentivize sales. When customers believe that they are getting a deal, they are much more willing to spend their hard-earned money than if they believe they are paying full price.

How do you structure discounts? Shopify.com lists three main ways to increase foot traffic and maintain loyalty with discounts, which are:

  • Promotional pricing – Discounts and bundle pricing, such as “buy one, get one free”
  • Point-of-purchase displays – “Impulse buys” that individuals don’t plan on purchasing when they come into the store. Bins with small items next to the register are great incentives for point-of-purchase displays.
  • Loyalty programs – Membership and punch cards, as well as a points system which reward customers with discounts or free items.

Events

unnamed1The holidays are the perfect time to organize events for your customers and potential leads. Planning a holiday party in your location will create a reason for you to invite Small Business Saturday patrons back to your location. In fact, one source claims that purchasing decisions are based more on emotions rather than on logic; therefore, face-to-face events allow brand owners to create an emotional connection to increase loyalty and drive sales.

Be creative and think of original ideas to drum up enthusiasm for your business; for example, IOU Financial held a scavenger hunt partnered with local discounts in Downtown Woodstock, GA. 

One caveat is that holiday parties and other events can turn into a financial strain if not planned for properly. Opening the doors and allowing streetwalkers to come inside can quickly lead to hundreds of people sampling your goods without guaranteed sales.

Not many small business owners can allow themselves to host expensive events, especially during the holiday time. Therefore, it is essential to plan and budget for events; one strategy is to hold member-only events with a concise guest list that goes out only to the most important customers. Another way is to invite customers and ask them to RSVP, allowing access to the first 50 who respond.

Keep the line of communication open between you and the customers you met during Small Business Saturdays with marketing emails, discounts and events. Remember, the more effort you put into promoting your relationship with your clients, the more loyal they will remain to your brand.

Shop with the Scarecrows! Well, at least in Woodstock, GA.

Small Business Saturday will be here November 26th, and will be taking downtown Woodstock, GA by storm. Scavenger hunts, selfie contests, prizes and discounts around town will be bringing flocks of customers out to shop small. The initiative was started by American Express to remind people that in between the Black Friday and Cyber Monday madness, supporting your local community with purchases can make a big impact! Small Business Saturday always falls on the Saturday after Thanksgiving for that reason.

Over time, the event has grown tremendously, last year 95 million people participated across the country, and AMEX has delegated responsibilities to Neighborhood Champions. This year, IOU Financial has been selected as Woodstock’s Neighborhood Champion, for the continued support of fueling small business growth.

IOU Financial has kicked off the #shopsmall movement by joining the neighborhood’s Scarecrow Invasion! Small businesses around downtown Woodstock have decorated scarecrows to represent certain facets of their business! So what is IOU Financial’s theme?2016-10-21_1306

MONOPOLY!

Yes, we know money isn’t a game, but we know it is fun when you see it in your bank account! The IOU Monopoly Scarecrow (#128) sits right outside Woodstock Pharmacy on Main Street. He’s got all the telling signs of a true monopoly man, a top hat, cane, and don’t forget all those IOU dollars floating around! The festive fall sign points customers back to why they should be focused on shopping small November 26.

If you live in or around downtown Woodstock, you know how many great restaurants, coffee shops, retailers, and more are located there. IOU Financial is proud of the thriving businesses in our local community, and excited to be part of the festivities that promote the growth of small businesses in our very own neighborhood!

If you happen to visit Woodstock before Halloween, stop by the Visitors Center and vote for our scarecrow #128. Votes are $1 each and all proceeds are donated to GROW, an organization that helps Woodstock complete beautification projects. Plus the winner receives bragging rights with an awesome trophy.

Don’t live near Downtown Woodstock? No problem! Visit shopsmall.com and see what your neighborhood has in store for Small Business Saturday.

#ShopSmall: Get Involved to Get Profitable and Make a Difference

If you own a small business, you are already providing jobs and offering great products and services to your community, but sometimes these efforts can go unnoticed. That’s where Small Business Saturday comes in. This year, on November 26, customers across the country will shop in their community and recognize the value that small businesses can bring to their local economy.

 

What is the Shop Small Movement?

First initiated in 2010, Small Business Saturday is an annual event sponsored by American Express, held on the Saturday after Thanksgiving. It is a response to shopping events such as Black Friday and Cyber Monday, when big retailers and corporations hold massive sales in stores and online. Small Business Saturday encourages individuals to patronize their local brick-and-mortar small businesses (with 500 or less employees), reminding everyone that when they invest in a local business, they invest in their community!

The Twitter hashtag  #SmallBusinessSaturday was used to build awareness for the event, as well as allow people to tag their favorite businesses. Last year, 95 million people went out to support local businesses in their neighborhoods!

 

Why are Small Businesses Important?

Although the United States is home to a multitude of big-box retailers and corporations, small businesses remain important and relevant. In fact, The Houston Chronicle reports that “according to the U.S. Small Business Administration (SBA), small businesses represent 99.7 percent of all employer firms. Since 1995, small businesses have generated 64 percent of new jobs, and paid 44 percent of the total United States private payroll, according to the SBA.”

Small businesses offer employment opportunities to local residents, contribute to the local economy, and provide funds for schools and government offices.

 

How Can You Participate in Small Business Saturday?

American Express encourages all small business owners to participate in Small Business Saturday by making engagement in your community as easy as possible. There are free custom marketing and advertising materials available for your storefront, website and social media. Additionally, there are articles and videos with tips and advice on how to promote this event and your business, such as offering specials and deals and holding contests.

 

How Can Small Businesses Get Involved in their Communities?

In addition to participating in Small Business Saturday, there are many benefits when businesses get involved in their local communities. By participating, sponsoring, and donating to events, charities, or sports teams, business owners market their brand and increase their customer base.


Customers respond to businesses that care about communities; a study by Cone Communications and Echo Research found that 82 percent of individuals take corporate social responsibility (CSR) into account when purchasing products or services from a business. In addition, when employees are given the opportunity to help their neighborhood, it increases their satisfaction levels and promotes employee retention.

How can you get involved in your community? Build off the Small Business Saturday momentum and implement any of these ideas:

  • Sponsor a little league team
  • Donate supplies to a school
  • Host a charity event for a homeless shelter
  • Sponsor a garden renovation project
  • Plant trees at a local park

There are many advantages to both local small businesses and communities when the two work together. If you are in the local Atlanta area, click here to find out more information about Small Business Saturday event in your area. If you live in another part of the country, find your local host and consider participating in Small Business Saturday to promote your small business in your community.

IOU Financial is Expanding Its Fast, Easy Loans to Canada

The demand for business lending in Canada is red hot, according to official statistics from the Canadian government. The Biannual Survey of Suppliers of Business Financing, last updated for the second half of 2014, shows business lenders disbursed 9.6 percent more money compared to the first half of 2014. That reflects the highest growth rate since 2011 and continues several years of consecutive increases.

Figure 1 Value of Credit Outstanding and Disbursed to All Business (CA$ billions).

Figure 1 Value of Credit Outstanding and Disbursed to All Business (CA$ billions).

The figure clearly indicates the need for significantly greater lending resources in Canada, which is why IOU Financial, one of America’s fastest growing commercial lenders, has launched its Canadian business loan product. With this lending program, Canadian small businesses – both English speaking and French – are able to borrow money in as little as one business day.

Canadian small businesses will appreciate the many advantages we offer to small- and medium-sized enterprises:

  • Quick Application: If you are accustomed to the mountain of paperwork banks collect from prospective borrowers, you’ll be astonished at how quickly you can apply to IOU Financial. It takes 10 minutes or less, and you can get a pre-approval right away.
  • Convenient Repayments: Unlike many conventional lenders that hit you with a huge monthly payment, IOU Financial collects daily fixed payments directly from your bank account. This greatly reduces the impact on your working capital.
  • No Upfront Costs: There are no upfront costs or hidden fees when you deal with IOU Financial. The application process is completely free and no-obligation.
  • No Prepayment Penalties: You can repay your balance at any time without penalty. We charge simple interest on our loans, which means you pay interest only on the principal you owe, not on accrued interest.
  • Affordable Rates: Our loan rates start as low as 6 percent. Our rates are half of what you would pay for a cash advance.
  • Loan Renewals: You can renew your IOU Financial loan after you’ve repaid 40 percent of the principal amount.

The Power of “Yes”

The biggest difference between IOU Financial Canada and ordinary banks is that we do everything possible to get you funded quickly, whatever your credit history or score. You see, we look at the whole picture when you apply for loan, including your company’s equity and cash flow. Many of our customers in the U.S. come to us after being turned down by a conventional bank. We are proud of the fact that we approve 85 percent of applications, based on the overall health of their business.

Our clients rave about our services. Voodoo Vapor Inc. told us, “We received our funding from IOU within days and it enables us to put newer product on our shelves more frequently. This gives us more reasons to engage with our target market on social media, attract new customers, and build relationships with loyal customers.” You can read the full case study here.

Our staff is ready to assist you with any questions you have! Canadian merchants and brokers are invited to call 844-750-5468 for more information on how the IOU Financial small business loan product could impact their business.

Getting Your Business Through a Financial Crisis

No matter how well you run your business, you are never immune to a potential financial crisis, either within your own company or in the general economy. That’s why it makes sense to plan for the worst as you hope for the best. Here are some tips to help you navigate through a financial crisis:

  1. Know what to do if you suddenly need funding. A cash crunch can occur for many reasons, including a lull in sales, good sales but thin profits, poor cash management and forecasting, and suddenly higher costs. You should establish a relationship with a commercial lender, like IOU Financial, so that you can quickly arrange for a small business loan when you need it. There are many ways to boost your company’s credit, see here for a rundown of available avenues.
  2. Streamline your operations. Streamline by improving cash collections and extending payment distributions. You’ll find many vendors will accommodate you when you’re in a crisis, because it’s in their interests for you to remain a viable customer for their offerings.
  3. Check your margins. If sales are good but profits are low, then expenses are out of control. If you don’t have one, institute a purchasing policy and system to buy your supplies and inventory from the right vendors at the most competitive prices.
  4. Manage your budget. You do have a budget, don’t you? It should include a forecast of cash flows so that you can identify and prepare for upcoming shortages. By comparing estimates with actuals, you’ll know where you are spending too much and can take steps to fix the problem. A budget is really a collection of sub-budgets, covering areas such as sales, operations, and cash. Online apps are available to help you calculate and manage your cash flows – take advantage of these, especially if you don’t have a financial expert on retainer.
  5. Boost sales. If your sales volume is heading downward, perk it up with advertising, promotions, sales and specials. However, discounting hurts profit margins, so a better strategy is to find ways to upsell and cross-sell to your customers, offering them added value for a modest additional cost. One way to gain visibility is to participate in community events and charitable functions. Re-evaluate your offerings and get rid of unprofitable goods or services.
  6. Sell assets. Another quick way to raise cash is to factor your accounts receivable and auction your inventory. These solutions are not as good as obtaining a small business loan, because they can have long-lasting negative effects on your image and your customer relations. Nonetheless, it’s a tool that works and it’s there for you to use. If you have multiple locations, consider closing some of them.
  7. Hire a CPA. If you find yourself repeatedly running short of cash, perhaps you’re not managing your finances well. Hire a CPA to consult with you and prepare monthly statements so that you have a better idea of what problems your business is facing. It wouldn’t hurt to become more financially literate, if that’s a problem.
  8. If your company is small- to mid-sized and you don’t have a CFO, you can rent CFO services to strategically help by establishing financial discipline and performing analysis and planning with regard to your long-term financial needs.
  9. Consolidate and reduce your debt. If you owe money to many creditors inside and outside your business, get a consolidation small business loan so that you can manage your debt effectively and hopefully pay it off faster. IOU Financial provides daily automatic repayment to take the pain and confusion out of managing your debt.
  10. Raise credit payments. If you have a lot of late-paying customers, raise your credit requirements and tighten up your credit terms. That means you need to communicate and enforce late payment penalties.

As you can see, the common denominator of all these problems is cash, or lack thereof. Your ability to borrow and raise cash may be all that keeps you afloat during a financial crisis, so be prepared and work out a plan for when bad things happen to good businesses.

What You Should Be Looking for (or Looking Out for) in a Loan Offer

For most small businesses, the question isn’t whether you will need a loan, the question is when. The business cycle involves ebbs and flows of capital needed to pay bills, draw salary and buy inventory. Without sufficient liquidity, a business may have to cut staff, curtail operations or simply close down. An affordable commercial loan is a lifeline that allows the business to continue to thrive and grow. But not all loan offers are the same. Let’s take a look at what separates the good from the bad.

  1. Size: Most banks scale small business loan offers solely to a company’s credit rating and history. Many a bank loan is turned down or is too small because loan officers have no leeway to look upon each applicant in its entirety. What you want is a loan offer that judges your business holistically, one that values cash flow as much as credit. A good commercial lender will use information — such as RiskLogic scores, industry, years in business and geographic location — to approve loans that bank loan officers can’t or won’t. A good lender should see how you’ve operated in the past and how you’ve used previous loans — did you use them to grow the business or to make foolish purchases.
  2. Speed: Bureaucracy, thy name is bank. If you’ve ever wondered why it takes a bank forever to approve (or disapprove) a small business loan, it’s usually because the people making the decisions reside in corporate headquarters — New York, Charlotte, Hartford, etc. — and have no personal contact with applicants. Applications are often paper-based and sending the information around the country takes time. A better idea is to use quick online application, have a fast-track reference process, deliver pre-approval in seconds and provide funding within 24 to 48 hours.
  3. Cost: Not all lenders charge the same. Merchant cash advances are notoriously expensive. When looking at alternative lenders, pick the one with lowest rates and the best reputation for trustworthiness, such as an A+ rating from the BBB. Choose a lender that charges simple rather than compound interest and which doesn’t penalize you for early repayment.
  4. Convenience: The easiest way to repay a small business loan is to have fixed daily payments automatically taken directly from your account without distracting you from your business. Also, daily fixed payments are easy to budget. A good lender will offer a loan renewal once 40 percent of the original loan’s principle has been repaid. Renewal can result in a lower interest rate and/or higher loan amount.
  5. Credit Enhancement: Guess what – a credit card advance or merchant advance does nothing to build your business’ creditworthiness. That’s another reason to stay away from this type of borrowing.
  6. Human Factors: Does your bank seem cold, remote and have trouble remembering your name. Look for a lender that values human interaction while remaining entirely professional. Courtesy should not be optional. Look for a lender that understands small business because it has roots as a small business.
  7. Honesty: No funny business! Watch out for bait-and-switch tactics, hidden fees, rates that change after the small business loan is made, and pushy loan officers who try to talk you into loan products that are not in your best interest. If a lender requires a large application fee, run the other way. There should be no upfront costs when applying for a loan.
  8. Availability: Lending at many banks simply dried up in 2008. Big business created the crisis, but small businesses took it on the chin. Look for an alternative lender that made loans when banks wouldn’t. They’ll be there the next time Wall Street blows up the economy.

At IOU Financial, we strive to be the best in all eight of these factors. See for yourself — contact us through email or online chat, or call us at 1-866-217-8564. Don’t settle, select!

 

Fast fair affordable

How to Reduce Small Business Debt

Your business can quickly spiral out of control if debt climbs to unsupportable levels. Sudden shocks are much harder to absorb if your cash flow is already tied up in debt service. The best remedy is to pay down your debt methodically. Insolvency and bankruptcy leave economic and psychological scars that you should work hard to avoid. Here are some ways to reduce business debt and improve your company’s finances:

  1. Update Your Budget: When you find it hard to pay monthly bills, sit down and review your budget. See where the cash inflows are failing to meet expectations and where expenses exceed the budgeted amounts. If the changes seem permanent, update your financial plan accordingly. Typically, the changes will involve variable expenses — changes to fixed costs should not come as a surprise, but in any case should be reflected in your budget and financial plan immediately. A revenue shortfall needs to be analyzed to see whether it is a temporary blip or a permanent change. Revise your budget so that you can continue to pay down your debt.
  2. Cut Expenses: You can devote more money to repaying debt by reducing your expenses. Think of cuts that will not cripple your business, such as unnecessary rented space, professional memberships, non-critical travel, non-essential employees or work hours and delayable inventory purchases. The trick is to make cuts that will increase net profits. For example, if you cut too much inventory, you may not be able to sustain your sales revenue. If you lay off too many employees, you may lose your operational edge. In some cases, it might be cheaper to use contract employees. If you explain the problems to your employees, they may agree to pay cuts until things begin to look up. If you have discretion over employer payments to workplace pension plans, omit your matching payments this year. With the advent of Obamacare, you might consider terminating your company’s health insurance plan. Offer incentives to higher-paid employees to take early retirement.
  3. Increase Revenue: Offer markdowns, volume discounts and better terms for cash payments. Speak with customers and see if they would be willing to move up the timing of their regular orders. If possible, increase marketing and advertising to stimulate sales. You might want to factor your accounts receivable to collect revenue sooner. Sell off assets you no longer need. Concentrate on inventory items with the biggest margins. You might have some goods or services that don’t really generate profits, so replace them with higher-margin alternatives. Introduce loyalty programs that reward repeat customers with special discounts and deals. If you run a brick-and-mortar retail business, perhaps you can expand into online operations and even begin selling to international customers. Online selling is very economical and can allow you to cut your fixed costs.
  4. Work with Vendors: Often, vendors will respond positively to requests to delay payments and may even float you a note for three to six months. It’s in vendors interests for your business to survive, so don’t be shy about negotiating with them. Prioritize vendor payments based on which ones have to be paid first.

Consolidate Your Debt: If you owe money to several creditors, you may be spending too much each month on minimum payments. Take out an affordable small business loan from IOU Financial to pay off your other debt. IOU Financial makes repayment easy by automatically collecting your payments daily directly from your checking account. This removes the scary prospect of large monthly payments and thus makes it much easier to budget.

 

IOU Financial Small Business Loans

5 Things Your Bank Won’t Say About Small Business Lending

We are not out to discredit banks or bankers, but we do believe that many potential borrowers make unwarranted assumptions about banks that we’d like to clear up. The bottom line is that sometimes a bank is a good place to get a small business loan, and other times it’s not.

  1. Banks Are Not Impartial

The small business loans you will be offered by your bank will be “products” that have been prepackaged for the “average” consumer. Certain products are favored and the bank pushes these, often offering incentives to loan officers who sell these products. This is not to say the products aren’t good, they just may not be good for you. Don’t expect you banker to tell you that, however.

  1. Most Bankers Are Not Credit Advisers

Even though bank officers may have fancy wood-paneled offices and wear expensive clothing doesn’t mean they have any certifications as credit advisors. For example, the average banker doesn’t have FICO Pro Certification, a basic credential that attests to knowledge of how credit scores work. Don’t expect this kind of expertise from the average banker, and if you need help with your credit history or score, be sure to speak to a qualified expert.

  1. Bank Loan Officers Are Not Human

Well, that’s a little extreme. What we really mean is that most banks use computer algorithms to determine whether you qualify for a loan and how much interest to charge you. Typically, the loan officer you visit takes down information and forwards it to the loan underwriters at the bank’s headquarters, who will not know or care one bit about any special circumstances attached to your small business loan request. For example, if you want to open a boutique in an up and coming area of town, some far-away analyst will look up the address, see that it’s listed as depressed and likely count that against you. In reality, the area may be on the rebound and your business plans may make a lot of sense.

  1. Banks Are Not the Only Alternative

Often, when entrepreneurs are turned down for bank loans, they feel that the door to credit has been shut on them. IOU Financial has made small business loans to thousands of such individuals, because they take the time to understand the full picture. Non-bank commercial lenders are looking for ways to say yes to your loan application. They have the flexibility to take into account a broad range of information beyond your credit score. Furthermore, non-bank lenders may be able to work out payment terms that banks do not offer. Banks can be a great resource, but remember that they are just one kind of resource – when it comes to small business loans, you have other options.

  1. Where Did My Loan Officer Go?

One dirty little secret among bank employees is that the good ones don’t remain at one place for very long. If your banker can draw a bigger salary from a competitor, chances are you’ll be assigned a stranger the next time you visit. Small business lending companies are run by entrepreneurs who are in it for the long run. If continuity of service and a personal relationship are important to you, think outside the box, er…bank, to include lenders where the owner is on premises and eager to meet with you.

For more small business lending advice be sure to subscribe to the IOU Financial blog.

IOU Financial Small Business Loans

Understanding How to Manage Capital

Cash is the lifeblood of small businesses, because often they do not have alternate sources of small business funding. A company’s current assets minus its current liabilities are its working capital. Cash and its equivalents — short-term Treasury bills and commercial paper — plus assets that can become cash within a year, such as accounts receivable, inventory and negotiable securities, are current assets. Debt due within a year, accounts payable, taxes payable, wages and salaries payable and other short-term liabilities are current liabilities. It’s up to you to choose how aggressively or conservatively to manage your working capital.

Aggressive Management

The use of short-term credit coupled with minimal spending on current assets characterizes aggressive management of working capital. You are basically operating on a restricted budget, cutting purchases of supplies and inventory to the nub while delaying bill payment for as long as possible. You also aggressively try to collect your A/R. You must not delay interest payments or tax payments. Your creditors will sue and might force you into bankruptcy and liquidation. The Internal Revenue Service takes a very dim view of missed tax payments. The proper use of convenient commercial small business loans, such as those available from IOU Financial, is a vital component in managing your working capital in an aggressive manner.

Conservative Management

At the opposite end of the spectrum, your working capital policy might be conservative: plenty of cash in the bank, inventory levels fully stocked and all bills paid on time. Your supply cabinets are full and employees need not justify a requisition for a new pencil. Typically, a conservative policy has a working capital ratio — that’s current liabilities divided into current assets — of 2 or greater. In other words, for every dollar of current liabilities, you have $2 of current assets. Following this less-risky policy, you’re not anticipating a cash crunch, but you might be getting a lower return, because cash in the bank doesn’t pay much. In effect, to buy some peace of mind, you are sacrificing profits and returns, because you are not leveraging your small business financing. The proper use of credit can help correct a capital management style that is too conservative.

Risk

As you make your working capital policies more aggressive, default and bankruptcy risk increases. For example, if you have little cash on hand and encounter a sudden emergency, you might have to default on an interest payment. Debtors might seize your property or wrestle the company away from you. This is precisely the time to take out a convenient commercial small business loan to get over the rough spots. In a less drastic example, if you skimp on inventory replacement, you’re vulnerable to stock outs, lost sales and alienated customers. Your vendors might stop doing business with you if you string them along for several months before coughing up payment. If you want to float new debt, your deteriorating credit rating will raise your interest rates and make it harder to find new lenders. A commercial loan is the best recourse in these circumstances. Conversely, if your working capital policy is too conservative, you incur opportunity costs by not working your money as hard as possible. This can lower your sales efficiency ratio — working capital divided into sales revenue — which can discourage investors in new debt and equity. Use small business loan proceeds to leverage you operations and increase you return.

Return

An overly aggressive policy increases your return on assets, but hurts your bottom line by lowering your inventory levels and crippling sales. However, the proper use of credit can avoid these problems while maintaining healthy returns. A conservative policy creates some lazy money that doesn’t earn much of a return. The optimal working capital policy lies somewhere between the two extremes. Your goal is to minimize risks while maximizing revenue — experience and experimentation will help you get it right. In just about every situation, consider the use of a commercial lending facility to optimize your return while managing your risks.