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Nine Things That Separate Good Business Lenders from Bad Ones

If you’ve ever had a bad experience applying for a bank loan, you understand how demeaning it can feel to be turned down. Regulation and low interest rates have made it tougher for banks to lend to small business. The tight-fistedness of the banks after the 2008 mortgage debacle created a vacuum which was filled by online business lending companies of varying quality. The best are a pleasure to work with, the worst are disappointing. Here are nine things to look for to distinguish the good from the bad:

Direct lender:

A direct online lender is a company that actually supplies the money it lends to borrowers. Many business-lending websites are mere matching services that send out your application to a network of lenders. That might sound good, but it’s not, because you end up paying much more for you capital. You see, the matching broker collects a fee from network lenders, who pass that fee onto you in the form of higher loan cost.

Ease of application:

Some lenders want extensive paperwork and documentation. A few operate over the phone, which is tedious. Look for a lender with a streamlined, paperless online application process that can be completed in minutes. And, perhaps it should go without saying, but we’ll say it anyway: Never pay an upfront fee to apply or qualify for a small business loan!

Quick approval:

There are two aspects to this. The first is that you’d like to be approved, so you will want to borrow from a direct lender with a high rate of loan approvals, say 85 percent. Secondly, you want the decision, and the money, quickly. A good lender looks beyond your credit score, makes a decision in minutes and gets you your money the next business day. A good lender will not do a hard pull on your credit. A bad lender may require extensive underwriting, which can waste days and still end up in a denial.

Sufficient amounts:

A business lender with a maximum loan limit of $25K or $50K won’t satisfy many small business borrowers who need more. Look for a direct lender who is willing to lend up to $150K.

Affordable rates:

A lean, efficient online business lender isn’t saddled with large overhead expenses that can drive up the cost of loans. Look for an interest rate well below the cost of a merchant cash advance. Merchant cash advance are not loans and can be very expensive.

Convenient repayment terms:

Hate that big monthly repayment that always seems to leave a gaping hole in your working capital? The best lenders take fixed daily loan payments directly from your bank account. It’s amazing how much more comfortable it is to spread the repayment over 20 daily installments rather than to pay it once a month. Only use lenders who offer fixed pay-back loans, so that you aren’t surprised by suddenly higher repayments.

Renewals:

Cash management is dynamic, and sometimes you need to renew a loan before the old one is paid off. Bad lenders won’t do this, but good ones will approve renewals after a certain portion, say 40 percent, of the original loan is repaid. This gives you the flexibility to take advantage of opportunities as they occur.

No prepayment fees:

Avoid a lender who soaks you with a prepayment fee or who charges you compound interest on your loan. Compound interest means you pay interest on your interest. Ouch! Go with a direct online lender who charges simple interest on your unpaid principal balance, and who never penalizes you for paying off your loan early.

Ratings:

Check a potential lender’s score from the Better Business Bureau and TrustPilot. If the score isn’t great, keep looking.

Not sure which online business lender to call? Try IOU Financial, a leading, publicly-traded small business lender. Contact us today for a no-strings-attached consultation.

Business Credit Basics: 3 Things You Need to Know Before Applying for a Loan

Applying for a business loan is a significant undertaking, and it’s a good idea to get your business operating as efficiently as possible before asking for a loan. The amount of preparation you’ll have to do really depends on whether you borrow from a bank or a commercial lender. A bank is going to grill you and demand a lot of information that a commercial lender will not need. Here are three things you need to get know when you apply for a bank loan, and how each one differs if you choose a commercial lender:

1. Know why you want the loan:

For some reason, banks feel the need to know exactly how you plan to spend every dime of your loan proceeds. We are not quite sure why this is so crucial for the bank to know, but the usual reasons include expansion opportunities, smoothing out working capital, investing in inventory or capital goods, and acquiring another company. Be prepared to show the banks how you will turn the loan money into profits (or how it will cut losses). On the other hand, a commercial lender like IOU Financial doesn’t really care how you plan to spend the loan proceeds. We assume that you know your business best, and we don’t like substituting our judgement for yours.

2. Know your books:

A bank is going to review all your books and records before approving a business loan. This includes all your past income statements, balance sheets, tax filings and all other public information. Be prepared for questions on why certain expenditures were made or why a particular strategy was worth the investment. You really don’t know what the bank loan officer or underwriting committee is going to ask. Sometimes, a line of questioning can lead to new questions in different areas, a process that can drag out for weeks or months. You can be sure the bank will calculate all your financial ratios, and will interrogate you on any that are below industry averages. We are really only looking for two things:

a. Does your business generate at least $100,000 a year in revenue?
b. Have you been in operation for at least one year?
If both are true, you are well on your way to obtaining a loan from us.

3. Know whether your cash flow allows you to repay the loan:

This is a very important question that every lender, including us, is going to ask. Now, a bank is going to want to analyze your sources and uses of funds, your cash management policies, and your projected and actual budgets. The bank may want to know about your collection policies and examine your bank statements. If it sounds like an extensive process, well, it is. We have a different view – we only ask two questions regarding cash flow:

a. Do you generate 10 or more deposits each month into your business bank account?
b. Do you maintain an average daily balance in your business bank account of at least $3,000?
Assuming you own at least 80 percent of your business (or 50 percent if owned with a spouse), you can qualify for a commercial loan from IOU Financial with just a few facts. With a bank, you are more likely to feel like a trial defendant under cross examination. Perhaps that’s why it takes days or months to get a bank loan, while we can lend you up to $150,000 in as little as one day.

Contact IOU Financial today for a free consultation about your small business’ loan needs.

5 Common Misconceptions About Alternative Lending

Alternative, or non-bank, lending got a big boost in 2008 when the mortgage meltdown caused banks to roll up their welcome mats. In that era of recriminations, no bank wanted to go out on a limb and lend to anyone other than the most creditworthy customers. Today, businesses have learned that alternative lending, which includes commercial business loans, factoring, peer-to-peer lending and crowdfunding, can solve many problems quickly and efficiently without a lot of the delay and paperwork associated with bank loans.

Still, some business owners have negative misconceptions about alternative lending, so we’d like to clear them up:

Only bank-rejects apply to alternative lenders:

While it’s true that many businesses find it easier to qualify for a loan from an alternative source than from a bank, many owners prefer dealing with alternative lenders, as they tend to be more flexible, less judgmental and faster to respond. Many alternative lenders do not require collateral, can process an application in a few hours, and fund a loan within a day or two. One feature that IOU Financial borrowers truly appreciate is daily automatic repayment, which means a business doesn’t have to face a large monthly payment that can disrupt the business’ cash position.

You have to be desperate to seek an alternative loan:

That’s just silly. Alternative lenders would soon go out of business if they lent only to companies on their last legs. The real story is that banks turn down loans for all sorts of reasons, many having nothing to do with creditworthiness. Alternative lenders assess the risk of each loan and assign an interest rate that makes sense. Companies with less than stellar credit scores can borrow from alternative lenders when needed, such as when they have to smooth out their working capital cash flows. Any good alternative lender wants to see its borrowers succeed, not fail, and will usually work with business owners to come up with solutions with the right fit.

You can hurt your credit score by borrowing from an alternative lender:

Poppycock! There is no truth to that myth, and in fact the opposite usually applies: If you pay back your loan responsibly, your business’ credit score should increase. Remember, business loans do not affect the individual credit scores of owners, they are strictly for business. The nice thing about getting an alternative loan is that by doing so, owners don’t have to pony up their own personal funds, which could indeed affect their credit scores.

You need high margins to make alternative loans work:

Loans from alternative lenders help all types of businesses, not just ones with high margins. IOU Financial has only four funding requirements, and none have anything to do with margins. We require that you own and operate your own business, have been in business for at least a year, make 10 or more deposits per month and have average daily balance of $3,000 per month. Margins schmargins!

Alternative lending is unregulated:

This is a common misconception stemming from the fact that alternative lenders do not have the same capital requirements as banks. But alternative lenders are not banks, they do not offer time deposit accounts and all the other services available from banks. The business model and cost structure of alternative lenders are much different from those of banks. Nonetheless, alternative lenders must adhere to federal and state lending regulations that require truthfulness and disclosure. There is also the whole area of contract law that governs alternative loans.

The alternative lending industry is strong and vibrant, because it serves the needs of many small businesses that otherwise wouldn’t be met. If you would like to discuss your own borrowing needs, call IOU Financial today for a free consultation.

5 Reasons to Choose a Small Business Loan Over Crowdfunding

On May 16, equity crowdfunding became a reality in the U.S. as a result of Title III of the 2012 Jumpstart Our Business Startups (JOBS) Act. The new rules allow a small private business to raise up to $1 million a year by selling shares to the general public without first registering the stock offering with the Securities and Exchange Commission. On the surface, this might seem like a boon to owners of small businesses, but closer analysis reveals that this well-meaning rule has a number of flaws. On the plus side, it does infuse up to $1 million into your business, but the price you pay for that money might make you think twice:

  1. New partners: If you are the sole owner of your small business, you might not like taking on a bunch of junior equity partners, each with a separate opinion, potentially offering advice on what they think you are doing wrong. Dealing with feedback and input from small or large investors can be a huge distraction, might influence decisions on how to run your business.
  2. Due diligence: The rules for equity crowdfunding subject you to a higher degree of time-consuming due diligence than what you’d experience through, say, a business loan. The reason is that your share sales must be mediated either by a broker dealer or an online funding portal, both of which are registered with the SEC and subject to its reporting standards. Basically, this means you have to allocate precious time and significant effort preparing disclosure documents about your small business, and then wait for the dealer or portal to its part.
  3. High costs: Did you know that you could spend anywhere from $30,000 to more than $100,000 simply to prepare the documents required for equity crowdfunding? Yikes! You’ll need to fork over paperwork for an SEC filing statement, legal disclosures, financial information and more. You must spend this money before you even know whether you’ll be successful in your capital raising efforts. And that’s not all – you’ll also have to pay the broker dealer or fundraising portal a share, usually 7 percent, of the money you raise. That’s $70,000 on a $1 million sale of shares, plus all the documentation costs.
  4. Ongoing reporting: Your paperwork nightmare doesn’t end when you sell your crowdfunded shares. The SEC requires that you produce reports periodically, because the agency is charged under Title III with monitoring the private market. This may likely require you to hire a lawyer and/or accountant to prepare this reporting properly.
  5. Limiting your options: Accepting funds from equity crowdfunding now can make it much harder to get any attention from venture capitalists or angel investors later on. Typically, these investors dislike petty shareholders even more than owners do.

Now, we are not saying that raising capital isn’t a good way to pump money into your business. But we think that it’s a lot easier and cheaper to start with a business loan. In today’s lending market, a small business owner can receive a loan with no upfront fees, no ongoing reporting, and no time wasted on petty shareholders.

If you’re looking for up to $150,000, IOU Financial can get you funds with instant pre-approval and funding in as little as 24 hours. When you compare the cost of a loan with what is required by equity crowdfunding, it’s clear that you can save a bundle by finding the right lender and avoiding the hassles of dealing with shareholders.

 

Common Mistakes When Applying for a Small Business Loan

Common Mistakes When Applying for a Business Loan

If you run a small business, sooner or later you are going to need an infusion of capital. When you are ready to take the plunge and seek funding, you don’t want to make a mistake right out of the gate that could complicate your chances of getting a loan later. Things like not having a clear plan for your loan, not borrowing the right amount, and taking too long to make a decision can make an otherwise exciting time in the lifecycle of your business frustrating. Here are the most common mistakes we see small business owners make, and how to avoid them.

Not Knowing Why You Want a Loan

Seems like a simple enough step. Yet every year, we encounter applicants who have only a vague notion of what they will spend the loan proceeds on. They may understand that they need to increase sales and profits, but haven’t really planned or priced out the specific actions they need to take.

Fortunately, if you find yourself in this situation, it can easily be fixed. Create a spreadsheet that lists your business goals, what actions are needed to achieve them, and how much money they will cost. Your goals should connect back to your overall business plan so not only do you have a clearer idea of price, but you are also clear on the loan’s purpose in the “big picture.” You also need to do a cost benefit analysis to calculate how much your business will benefit by achieving the goals you’ve listed. Your cost benefit analysis doesn’t have to reach military precision, just a reasonable estimate of how you think events will pan out.

If you’re unsure of your plans, then seek outside confirmation before you start applying for loans. There are plenty of resources available from the Small Business Administration to your local chamber of commerce. When you’re satisfied with your plan, commit to it and apply for the loan.

Borrowing Too Little

Another problem applicants run into is over-optimism, meaning they have calculated the business’ borrowing needs based on a best-case scenario but missed the secondary effects of the loan. For example, you might rightly conclude that if you could borrow to increase your inventory, you would easily increase your sales volume. That might be true, but will you also need to increase store space or hire more staff? Not borrowing enough to cover secondary effects like space and staffing can mean, at best, returning for an additional loan, and at worst, failing to execute your plan and potentially jeopardizing your business because you ran out of money.

Borrowing Too Much

It feels good to see money in your business account, and you might think, hey – I might as well borrow extra “just in case.” There is nothing wrong with building contingencies based on a worst-case scenario into your plans so you can make sure to still deploy your borrowings effectively. However, good contingency planning is specific and focused. What doesn’t make sense is to borrow way more than you need just to make yourself feel more secure, or worse, to mask fundamental problems with your business.

The risks are that you will waste money needlessly on interest payments and that you’ll fritter away the extra money on business whims rather than relying on solid planning. Then, when you suddenly need extra funds for a real reason, your access to credit might be limited due to the amount you already owe.

Don’t Dawdle

Take as much time as you need to formulate your borrowing plans, but once you’ve worked out what you need and have applied for a loan, don’t waste time deciding whether you should go forward or not.  It takes time for a lender to process a loan application. Some, like IOU Financial, might be able to give you a next day funding, but some might take far longer to pull your credit history, check out your current financials, and so forth. If you wait more than 30 days to make a decision, lenders will have to pull your credit history again. While IOU Financial does a “soft” pull that doesn’t affect your credit score, some other lenders do hard pulls that can damage your score. Furthermore, by needlessly procrastinating, you risk higher interest rates, and the problems that motivated the original loan request might suddenly get worse, perhaps making it harder to get the original amount approved.

If you have a good business and a solid plan for your loan, IOU Financial will be happy to quickly see if you qualify for one of our flexible business loans at a competitive interest rate. Do your homework, be clear on the amount you need to borrow, then contact us and we’ll get you the money you need in 24 to 48 hours.

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!

 

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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.