In recent years, small business loan applicants have been more successful with securing funds for their businesses. Data taken from March of 2018 shows the approval percentage for entrepreneurs and small business owners has risen to a record high of 27% with big banking institutions. These are banks with at least $10 billion plus in funds and assets.
While this number alone is exciting and impressive for those wishing to secure financing for their business, the March numbers are up one-tenth of a percent from what was reported during the month of February. It would seem that the big bank approval numbers are trending upwards. This is no surprise considering the overall financials for the majority of small business owners from 2018. They have proven profitable and have earned recognition as creditworthy borrowers.
The growing interest in becoming a small business owner has created many opportunities for new lending partners and capital growth groups. Entrepreneurs have many financial resources available to them. Some have more stringent application requirements than others, such as a loan petition from the Small Business Administration. Online lenders like https://www.quickloansdirect.com are easier to secure, although potentially with higher lending rates than a traditional financing plan.
When considering lending, business owners struggling to get their company off the ground are looking to save every penny they can. Fortunately, the Federal Reserve has taken notice of the trends in business lending and has slowed the general pattern of incrementally raising interest rates every few quarters. This is excellent news for those who have considered jumping into the small business arena but need funds to do so. The latest rate change is projected to occur in 2019, giving borrowers a brief reprieve from increased interest. The target rate is slated to remain between 2.25% and 2.5%.
In spite of the great news that application approvals are trending upwards, statistics show that almost three quarters of all applications remain unapproved and rejected. The post-recession high percentages of approvals are impressive, but from an economic standpoint, can they really be considered enough to further overall growth.
While it would seem that the lenders are at fault for the rejection data, the culprit is often an incomplete or insufficient loan application. Financial data is crucial to the application process, and documentation usually demands personal and business tax returns, a balance sheet, a profit and loss report, personal bank statements, business bank statements, and reports of any personal investment into the company.
Lenders also generally wish to see a professional, well-written business plan of the company. It should outline the future plans and financial projections in correlation to the funds being requested. The bank may also wish to see copies of any documents pertaining to a lease or mortgage for a building, permits, licenses, patents, or incorporation documentation.
Because many small business owners haven’t accumulated this type of information at the outset of their venture, their applications are usually only partially completed. This often forces a bank, which has strict lending guidelines and accountability to federal agencies, to reject the application.
The Struggle With Credit
Even though the United States has it own trouble concerning its national credit rating, lenders have maintained an expectation of consumer responsibility with their credit scores and payment histories. Significant weight is placed on both the personal and business credit score for applications, with 300 being a poor rating at the low end and 850 being an excellent credit standing.
The credit score includes timely payment of debt, as well as the overall ability to pay for the loan amidst the other outstanding accounts that may be reflected on the report. Consistency in payments is just one area of concern, as banks will also assess the utilization rates on revolving credit accounts such as a credit card. Unfortunately, many small business owners turn to credit cards as a temporary solution to finance many of their business needs.
The Federal Reserve indicated that online credit applications for small business owners were up to 24% in November of 2018, an increase of 3% since 2016. Much of the increase in online credit is being attributed to technology companies like PayPal, Square, and Amazon, who have less restrictive lending requirements than the big banks and capitalist lenders.
However, if the company is not able to keep up with their expenses, their continued financial decision to charge and purchase on credit could negatively impact their utilization numbers and jeopardize the ability to secure a low interest bank loan.
There are several places where individuals can go to retrieve their credit score prior to completing a loan application, but businesses rely on credit bureaus such as Dun & Bradstreet for their numbers.
Forcing the Hand
Because many of those who completed online applications with less traditional lenders are being approved, big banks have started to feel the pressure. Online lenders held almost $6 billion in small business loans during 2017. These non-traditional lenders are forcing the hand of banks and financiers everywhere to improve their rates and approval statics if they want to get in on the action.