According to a recent study, 70% of entrepreneurs bootstrap and fund their businesses from their own pocketbooks. But while personal financing can go a long way toward getting a startup off the ground, it may also be putting retirement dollars at risk.
Fortunately, today’s entrepreneurs don’t need to give up on their dreams of business ownership because of a lack of capital. In fact, recent reports reveal a rise in approval ratings for small business loans, provided that entrepreneurs choose the right lenders.
It’s no surprise that loan approval rates dropped significantly during the financial crisis. However, in recent years, traditional banks and credit unions have begun to relax their standards when it comes to small business loans. According to a report by Biz2Credit, loan approval rates reached their highest post-recession levels in March 2014, with banks signing off an impressive 21.6% of loan applications.
Understanding the Trend
While the recovering economy is one explanation for the trend, experts also believe that traditional lenders are changing their attitudes toward small businesses. Recognizing the vital role that small businesses play in creating jobs and stabilizing the economy, Wells Fargo recently pledged to loan $100 billion to small businesses by the end of 2018. This change may open up the possibility of entrepreneurship to a greater range of Americans in the coming years.
But despite the increase in support from the bigger banks, approval rates at small lending institutions are still on the low side. Following a period of all-time-high approval rates in May 2014, numbers have fallen progressively for the past year. If they hope to succeed in securing funding in 2015, small business owners may need to pursue alternative lending opportunities.
The Rise of Alternative Lending
An increase in alternative lending is one of the biggest trends affecting small business owners in 2015. Here are just a few of the lending sources currently open to entrepreneurs:
Many small businesses are opting to pursue peer-to-peer lending instead of traditional bank loans. Groups like Lending Club offer entrepreneurs competitive rates on capital, provided they can draw the interest of investors. With available funding of up to $300,000, peer-to-peer lending is a viable option for many small business owners seeking to grow their companies.
Recent policy changes have made the Small Business Administration a more feasible funding source for small businesses. And because SBA loans offer more favorable rates than those coming from other sources, this lending option is especially attractive.
In the past, the SBA’s “wealth test” disqualified loan applicants exceeding a particular income level, as well as those who didn’t want the government examining their finances with a fine-toothed comb. Additionally, the SBA put a restrictive timeframe on qualifying expenses, meaning that the loan could not be used to fund business purchases made more than nine months prior to receipt. The recent removal of the wealth test and timeframe restrictions make SBA loans a good option for a wider range of entrepreneurs.
Crowdfunding uses an online platform to aggregate loan requests, and crowdfunding sites have financed a wide array of projects, ranging from films to high-end watches; they’ve even saved a few small businesses from closing down.
With crowdfunding, because multiple individuals pool their funds to finance a project, the risk to any one lender is lessened. Although crowdfunding loans tend to have higher interest levels than bank loans, financial experts predict that rates will become more competitive in the coming months.
Crowdfunding is a good option for younger entrepreneurs who are comfortable in an online setting, as well as those with small business ideas that aren’t considered bankable for one reason or another.
Factors Affecting Small Business Lending
While small business owners have access to more loan options today than ever before, not all entrepreneurs will qualify for funding. When evaluating loan applicants, traditional lenders (e.g. banks) consider a variety of factors, including number of employees, industry-specific trends and the amount of time you’ve been in business. Additionally, both traditional and alternative lenders evaluate a wide array of financial factors before agreeing to a business loan.
While cash flow and FICO scores remain crucial, modern lenders are also interested in credit-card sales and credit partners, business deposit histories and, in some cases, even a company’s social-media reach. This change in lending standards may make business loans accessible to a wider range of borrowers in the coming months.
Today’s small businesses have more options at their disposal than ever before when it comes to loan sources. Understanding what lending trends to expect in 2015 can help you determine the best method of funding your dream business while protecting your pocketbook.
Want a better chance at landing a small business loan? See our article on how to improve your business’ credit score.