Bridging the Gap Between Banks and Small Business Lending

Bridging the Gap Between Banks and Small Business Lending

According to the Small Business American Dream Gap Report, almost 25% of all small businesses consider shutting down due to cashflow issues. With a reported 30 million SMBs in the United States, 7.5 million SMBs are at risk. Traditional banks literally vacated the SMB lending space after the 2008-09 financial crisis. Moreover, changes in minimum […]

Bridging the Gap Between Banks and Small Business Lending

According to the Small Business American Dream Gap Report, almost 25% of all small businesses consider shutting down due to cashflow issues. With a reported 30 million SMBs in the United States, 7.5 million SMBs are at risk. Traditional banks literally vacated the SMB lending space after the 2008-09 financial crisis. Moreover, changes in minimum wage and competition from automation, Amazon, and cash burning startups have disrupted the SMB ecosystem. SmartBiz Loans understands the pain point of the market and was launched to help minimize this funding gap.

About SmartBiz Loans

Set up in 2010 by Ryan Gilbert, SmartBiz Loans was incubated through PayPal and Venrock.

The company started as a consumer credit delivery platform and later pivoted towards small businesses. The San Francisco-based startup has raised almost $40 million in funding from a list of marquee investors including its original incubators.

Currently headed by Evan Singer, SmartBiz Loans has been the pioneer in creating the leading online marketplace for SBA loans. It partners with banks across the country and establishes a win-win situation for both small businesses and lenders by ensuring that the “tedious” process of loan application becomes as intuitive and hassle-free as possible.

What SmartBiz Loans Can Do for SMBs

Businesses across the nation struggle to meet their day-to-day requirements for working capital and maintaining optimum cash flow. SmartBiz Loasn bridges the gap between the bankers and the borrowers by avoiding unnecessary loan application rejections by banks. The startup uses artificial intelligence to act as third-party advisor to small businesses and give them insight into what happens during the credit decisioning process. It helps entrepreneurs understand why SBA loan applications are rejected so that borrowers can mitigate the chances of loan application rejection. Also, SmartBiz focuses on reducing unnecessary delays in the loan application process.

SmartBiz Lending Products

SmartBiz specializes in SBA loans for working capital, refinancing, and SBA 7(a) commercial real estate loans.

SBA loans are considered the gold standard in the industry due to their lower interest rates and longer tenures. The company’s average loans range from $30,000 to $5 million, tenure ranges up to 10-25 years for different products, and APR ranges form 6%-8.25%.

Another feather in SmartBiz Loans’ cap is the advisory services the company extends to clients through its SmartBiz Advisor service. This product is an amalgamation of all SmartBiz services and helps businesses find out how bankers view them as a potential borrower for an SBA loan while helping the business take the necessary steps to ensure SBA loan approval. From viewing the tax returns of businesses to providing them with a proprietary credit score to performing debt analysis, SmartBiz Loans recommends ways to improve their clients’ financial health.

Working the SmartBiz SBA Loan System

The SmartBiz SBA Loan system is designed to be intuitive and simple. It evaluates a borrower’s score by using AI and machine learning technology to ensure the borrower is an ideal fit for an SBA loan. Then the right borrower is directed to the right bank. On the other hand, SmartBiz Loans partners with banks and licenses its software to help them in automatic loan underwriting. Most impressive is the fact that almost 90% of borrowers referred by SmartBiz Loans are approved for bank loans. Such a high acceptance rate reduces the cost of client acquisition for banks and improves the overall borrower experience.

Dealing with Competition

According to the Singer, SmartBiz Loans is the AI-powered chief financial officer for small businesses that find it hard to hire their own CFOs. Although SmartBiz faces aggressive competition in the industry, its pace of growth, proprietary artificial intelligence and machine learning technology, and access to in-house databases, including tax data, have helped it create its own alternative lending niche.

SmartBiz Loans recently crossed originations of $500 million in funded SBA loans. It was the biggest facilitator for funding of SBA 7(a) loans in the year 2016, and it overtook JPMorgan Chase as the leading provider of SBA 7(a) loans.

Diversity of Customers

SmartBiz Loans caters to a broad customer base across 50 states. Most of the borrowers that approach the lender have been in business for 5-10 years, work with less than 10 employees, and their average annual revenue ranges between $500,000 to $2 million.

SmartBiz Loans has helped reduce the underlying gender bias in SMB funding by originating almost 17% of its SBA loans to women-owned small businesses. Also, SBA loans for veterans account for 8% of its total originations.

SmartBiz Loans and the Future of SBA(7a) Lending

Apart from boosting its other products, SmartBiz plans to delve deep into SmartBiz Advisor in order to streamline the process of making SBA credit easily available for small businesses. Though currently serving the United States, it is also looking to expand abroad in the coming years.

Creating the ideal marketplace for SBA Loans, SmartBiz Loans is the number one online marketplace for SBA 7(a) loans. Its deep domain expertise coupled with its customer service obsession make its an easy bet for future unicorn status.

Author:

Written by Heena Dhir.

8 Key Reasons Small Businesses Are Denied Loans

life insurance sba loans

There’s no doubt about it: growing a small business is no small challenge. No matter how amazing your idea or product, you’re bound to encounter some serious mountains. According to a TD bank 2017 Business Survey, some of the key challenges that small US-based businesses face today are rising interest rates and rising healthcare costs, both […]

life insurance sba loans

There’s no doubt about it: growing a small business is no small challenge. No matter how amazing your idea or product, you’re bound to encounter some serious mountains.

According to a TD bank 2017 Business Survey, some of the key challenges that small US-based businesses face today are rising interest rates and rising healthcare costs, both of which can be at least partly attributed to uncertainty surrounding the state of political leadership.

And these days, more and more small businesses like startups are turning to credit cards and other forms of financing over bank loans than ever before. This is partly because some one in four businesses applying for credit were denied, and the ones who received financing did not get as much as they needed.

According to the Federal Reserve Bank of New York:

“… although many employer small businesses were profitable and optimistic, a significant majority faced financial challenges, experienced funding gaps and relied on personal finances. These issues were even more pronounced for the smallest firms, which were less likely to receive necessary funding and more likely to rely on personal finances to operate.”

Despite the fact that the vast majority of businesses in the United States are classified as small businesses – that is, they have employee bases of 500 or less – approximately half of all businesses fail in the first 5 years.

Many of these fail due to lack of funds and a lack of finances.

On top of that, even the businesses that succeed don’t even break even for 2 or 3 years, making financing at the outset crucial. The tricky part is that securing financing is also the most difficult part, which is why so many small businesses are denied financing. And owners are understandably frustrated.

Here are a few key reasons why small businesses are often denied funding.

An Uncertain Economic Climate

Uncertainty behind the local and regional economy is a basic stressor and reason behind the struggle many small businesses encounter. This very uncertainty is why so many businesses are likely to seek financing.

Unfortunately, this problem is also a reason why banks are less likely to give loans. When times are tight, lending is too. Banks aren’t inclined to lend when it’s possible the economy will take a dive, tanking many small businesses.

Because of this, many people are turning to personal savings, lines of credit, and even loans from family and friends.

Lack of Collateral

Collateral is some type of asset which secures the loan. This collateral can be some type of equipment, real estate, or anything else a bank could repossess and sell if the business fails to repay the loan.

It’s crucial for small businesses to list collateral on loan applications for the obvious reason of showing that they can pay it back in the case of default. The problem is that most startups don’t have much collateral like vehicles or business equipment. The result is the small business is denied a loan.

Gender and/or Ethnic Bias

Unfortunately, there appears to still be a major gap here, even though lenders are not supposed to be biased in this way. In fact, loan approval rates are much higher for white males than they are for women and minorities.

According to gudcapital.com:

“… small businesses that were more than 50 percent owned by a woman only received 15 percent of all SBA 7(a) loan approvals; American Indian owned businesses received 1 percent; Asian owned businesses received 24 percent; African American owned businesses received 2 percent; Hispanic owned businesses received 6 percent; White owned businesses received 53 percent; and male owned businesses received 70 percent of all SBA 7(a) loan approvals.”

The sexism can be so bad that some female founder resort to extreme measures, like creating an imaginary male founder to dispel the bias.

Bad Credit History

If a business owner has a terrible credit score, there’s a really good chance they’ll be denied funding. No surprise here.

This is why it’s so important that business owners get to know their credit score before they apply for a loan. Additionally, they should focus on building a solid credit score from the get go, even if they think they won’t need a big loan.

Understanding your business credit score makes you more likely to be approved for a loan and more prepared to grow your business.

What many don’t realize is that if you’re a small business owner, you need to have both a strong personal and business credit score to secure a significant amount of financing from major banks. There’s no way around this.

According to nav.com, the ideal credit score is 680 to 720. It also helps if a business owner understands how to demonstrate a solid history of responsible money management.

If you your credit score is low, you’ll need to spend time improving it before applying for a loan.

High Operating Expenses and Slow Growth

If a business can’t adequately demonstrate growth and growth projections, they may have trouble securing adequate financing for further growth—another catch-22 situation.

According to a Small Business American Dream Gap Report, 3 of 10 small businesses face challenges covering operating expenses. This trend is often due to the challenges of incorporating new employees as well as expanding or building inventory. Unfortunately, if they can’t cover their expenses, they’ll have difficulty securing funding

According to Entrepreneur.com, some 26 % of business owners don’t hire or expand because they don’t have the funds to do so. In turn, they resort to personal savings or loans from friends and family, despite the significant risks and high interest rates involved in these actions.

Lack of Cash Flow

In the past year or so, about 45% of businesses sought out financing, namely to cover operating expenses and expansion. This need for funding indicates a severe need for extra cash flow, which can be a huge red flag to banks.

Cash flow is not only one of the main reasons that existing businesses fail, it’s also a top reason why financing applications get denied. The reason behind this is simple: expenses come first before loans. This makes sense if you think about it on a personal financing level as well: you’re going to pay your rent and bills before you pay your loan payments. It’s simply a matter of priority.

Type of Business

According to nav.com, business owners are more likely to be denied financing if they are sole proprietors, brand new businesses, or state-approved businesses. In addition, businesses are liable to be rejected based on the type of industry they’re in.

In this game, size matters, and unfortunately the very nature of most small businesses makes them a bigger risk, especially if they are new. According to the Federal Reserve Website, smaller firms are “notably less successful at obtaining financing at large banks (45% success) than larger firms … (72% success).”

Part of the way a bank assesses a loan application is by assessing the customer base. If they’re looking at an application from a business in an industry that has a stable customer base, they are more likely to approve the application. Showing diversity in your client base is a key way to show secure projections.

Unclear Understanding of the Financing Process or Options

According to nav.com, there are at least 44 of different options for small business financing in the U.S. Depending on your area and/or industry, there may even be specialized grant options that are not widely advertised. Entrepreneur.com reports that some 20% of businesses applying for loans in the past 5 years had experienced multiple rejections and a quarter of these did not have a clear reason for the denial.

Researching and applying for these can be extremely time-consuming, which is why it’s recommended that small businesses ask the local business association for tips pertaining to their specific situation and/or industry.

All this points to a serious lack of understanding and transparency around what makes a business credit worthy. If people simply aren’t aware from the get go, or they’re asking questions but not getting clear answers, there’s obviously a problem.

Conclusion

To better prepare for loan applications, small business entrepreneurs need to have a clear picture of their current status, both in terms of financing and in terms of future projections.

They need to understand the context of securing funding to build accurate projections, and they can then send these projections with the loan applications to hopefully create a positive feedback loop.

But beyond that, small business owners need to thoroughly demonstrate their financial responsibility in order to have the best chance of securing crucial funding.

When you have business self-awareness, you are much more likely to succeed and to get the financing you so desperately need.

This article originally appeared at Life Insurance for SBA Loans.

Author:

Written by Life Insurance for SBA Loans.

Solving The Small Business Credit Dilemma

business credit scores Nav.com

Before online lending, long before Credit Karma, and way before machine learning powered by cloud-based applications, if a person or business needed to clean up their credit in order to apply for and be approved for a loan, perhaps even getting a loan on better terms, they had to write letters to each credit bureau […]

business credit scores Nav.com

Before online lending, long before Credit Karma, and way before machine learning powered by cloud-based applications, if a person or business needed to clean up their credit in order to apply for and be approved for a loan, perhaps even getting a loan on better terms, they had to write letters to each credit bureau where bad actions were recorded and ask to have those actions removed. That may have also entailed working out a payment plan with creditors who reported those actions in order to get in their good graces. Levi King understands that process well.

He also understands the challenges of being a small business owner. Having owned a hotel, a management company, a retail financial services company, and several franchises–all before co-founding Lendio and Nav–he’s seen countless small business owners with low credit problems.

“I’ve applied for financing about 30 different times,” he said, “and learned the hard way how it all works.”

King and Caton Hanson, a lawyer specializing in business credit, opened the doors to Nav in 2012. The lifelong friends saw a need for small business owners to manage their business credit and streamline access to financing. They each contributed half a million dollars out of pocket and raised another $40 million from venture capitalists. Last August, Experian, one of the tree major credit bureaus in the U.S., put in another $15 million. Tencent Holdings and Kleiner Perkins are both notable investors.

The Platform That Monitors Small Business Credit

Nav.com and its mobile app provide tools integrating and improving credit data so owners can get reporting, dispute errors, set goals, and keep track of where they are in relation to those goals.

“We start with where lenders say the credit box is,” King said. “We use machine learning and a match factor to unveil what’s keeping you from getting approved so you can work on that.”

The direct integration with various credit bureaus and customized alerts let small business owners see something wrong and act immediately by clicking to dispute those actions. The app redirects to the credit bureau websites where errors can be disputed online.

“We can predict errors, and the bureaus agree most of the time,” King said. “We like to measure engagement. How often do users log in? Is data improving? We’ve seen gains in both of those, and in credit approval. We’d like to remove the friction of applying for loans by getting people approved before they ever apply.”

Customer numbers have gone from 5,000 to 200,000 in two years as small business owners discover this alternative to dealing with each bureau separately. Unlike Credit Karma, they serve only the small business market. Nav hopes to continue adding data so customers can see information that lenders can use against them or that would help in making financial decisions. Their core product–business credit report scores–is free. For less than $30/month, users can get an additional dataset or credit check.

King said Nav hopes to incorporate PayPal and other data to the platform so that customers can focus on removing the friction of applying for loans and get approved before they ever apply.

Nav is bringing transparency to credit for the small business owner and solving the credit dilemma.

Authors:

Written with Nicki Jacoby.

Allen Taylor