When it comes to helping companies get a small business loan, Fundera wants to make the process as easy and transparent as possible for borrowers. Not only do we cut down on the amount of paperwork, but we also find new ways to inform and inspire small business owners.
If you want to know how to get a business loan, some of the best advice you can get is straight from the lenders. Therefore, we sat down with Steve Goodrich, the managing partner of North End Financial, to answer some of our most popular questions from borrowers:
“Businesses that get loans are the ones that are most likely to pay them back. A variety of businesses are getting loans these days, including owners of professional services (dentists, doctors and veterinarians), retailers with high-transaction volume, mechanics (people are holding on to their cars longer) and trade providers, such as plumbers and electricians. Also, software businesses are attractive.
The strength of a business is all about the cash [it has] in the bank and its track record of paying its debts. Startups are tough, because you can’t really evaluate them.
The best predictor of a company’s ability to pay a loan back is the number of years it has been in business. If you compared two different businesses, one with a FICO score of 720 and one with a FICO score of 620, whichever’s been in business longer is more likely to pay a loan back, so its more likely to get the loan.
Today, a company that’s been in business more than five years (meaning it survived the recession) is likely to make it further, and therefore more likely to get a loan.”
“At North End Financial we run a personal credit report. We’re looking for markers like bank liens or bankruptcies. Though these are not as important if a business can pay you back, so we look at a company’s transactional history of debits and credits—at one, three and six month balances. Are they getting paid daily? Weekly? Or are they paid in lump payments? At North End we like to see weekly recurring payments.
We also look at the frequency of the transaction values and the long-term trend in balances. For seasonal businesses, we look at cash flow, not their annual financials.”
“Many small business owners don’t like to leave money in the business and maintain only minimum cash reserves. Of course business owners should take money out of their businesses to pay themselves and spend money reinvesting in their companies. However, you’re more likely to get a loan if you prime the pump and build up your cash reserves over time.
Showing you have the ability to build and maintain cash reserves while running your business enables you to actually borrow at a multiple of those reserves. For example, having $10,000 to $15,000 in reserves in your account qualifies you for a $50,000 loan.”
“Small business owners [often] have stars in their eyes about what they’d do with the money they ‘d borrow. They take (borrow) money hoping they can do something productive with it.
But that becomes an instant lien. We advise business owners to be clear about their fixed needs and not to take more money than they really need. You need to have a clear understanding of how you will use the money, and if you have enough money coming in to know you can actually pay the loan back.”