Many small business owners struggle to obtain business financing, and there is absolutely nothing unusual about this. Getting a business loan for small businesses like retailers, restaurants, garages, etc. is not as simple as you might think from the bank.
However, this does not mean that it is not possible to obtain a business loan. It all depends on where you go to look for the loan. There are typically two main options business owners have: approach their local banks and go to a private financer or lender.
Banks and Small Business Loans
Banks look at small business loan applications from your perspective, and your perspective is determined by their criteria. When we talk about criteria, there are numerous criteria and all of them are rigid and strict.
Banks generally require high credit scores, which should be around 700 or higher. If a business applying for a loan with the bank lacks excellent credit, their application will be rejected simply based on that criteria. In conclusion to banks and credit scores, financing bad credit businesses with a bank is not a possibility.
This is not to say that there aren’t a number of other criteria, which are carefully followed by banks and taken just as seriously. Bank criteria have been established for decades based on shared experience, and these criteria are general.
As is generally recognized, banks are not very interested in financing small business loans. The reasons for this are many and one of the main reasons is that small businesses are considered high risk investments from the perspective and experience of banks.
Private Funders and Small Business Loans
With a private lender, the situation is completely different from what a business owner will experience with a bank. Private lenders have a completely different list of criteria for providing cash advances to business owners.
As private lenders mainly offer MCAs (Merchant Cash Advances), the criteria for these is simple. An MCA loan is an unsecured loan and does not require high credit scores either. As a result, it is easy to qualify for this type of financing.
However, many small business owners don’t view MCAs in a friendly light, and for good reason. Interest rates are higher than traditional bank loans and most business owners want low interest rates.
However, the objective of the MCA is not to compete with bank financing, since both are in quite different scenarios. Aside from the fact that they are both business finance, the entire process, requirements, features, and all other details related to finance are completely different.
With an MCA loan, the question of how to qualify for small business loans doesn’t really apply. Only in very few cases do private lenders turn down small businesses. In general, most companies receive the funds they need for their business.
MCA Loans V/S Bank Loans
Merchant cash advances or MCAs, in short, are usually accompanied by high interest rates. Much higher than what the bank offers, and the reason for this is that these are short-term loans without collateral.
There are many businesses that would never qualify for a traditional bank loan, no matter how much they need or want it. If your credit scores are low, or if you can’t provide the collateral banks require, your applications will be rejected. This isn’t to say that there aren’t plenty of other reasons banks won’t turn down small business loan applications. Also, banks are under no obligation to provide financing to those who choose not to. This leaves many small businesses with no other option.
For an MCA loan, a business doesn’t require much in the way of credit scores and collateral. The basic criteria for an MCA loan are mentioned here, as follows. The business must be at least 12 months old and in operation. The business owner must not be in active bankruptcy at the time of the loan application. Finally, the gross income of the business must be at least $10 thousand per month.
Simple criteria make it easy to get an MCA, and the drawbacks are definitely interest rates and duration for some business owners. However, those who take advantage of such business financing are those companies that have no other choice or those that require fast business loans. Some of the advantages are the processing times, which can be as little as a couple of days.