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Many small business owners struggle with obtaining business finance, and there is nothing unusual in that. Getting business loans for small businesses, such as retailers, restaurants, garages, etc., from a bank is not as easy as it sounds.
However, this is not to say that obtaining a business loan is not possible. It all depends on where one goes in search of loans. Generally, there are two primary options that business owners have, approaching their local banks and going with a private funder or lender.
Bank and Small Business Loans
Banks look at small business loan applications from their perspective and their approach is determined by their criteria. When we talk of norms, there are many norms and all of them are non-flexible as well as stringent.
Generally, banks require a high credit score, which should be around 700 or above. If the business applying for the loan with the bank lacks excellent credit, their application will be rejected based on that one criteria only. In conclusion to banks and credit scores, business funding with a bank with bad credit is unlikely.
This is not to say that there are not many other norms which banks follow scrupulously and take equally seriously. Banks’ norms have been established over decades based on shared experience, and these norms are across the board.
As is generally accepted, banks are not very keen on funding small business loans. There are many reasons for this and one of the primary reasons is that, small businesses are considered high risk investments from the perspective and experience of banks.
Private Funds and Small Business Loans
The situation with a private lender is completely different from what a business owner would 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 MCA (Merchant Cash Advance), the criteria for these is simple. MCA loan is an unsecured loan, and it also does not require a high credit score. As a result it is easier to qualify for this type of financing.
However, many small business owners don’t view the MCA favorably, and they have reasons for that. Interest rates are higher than traditional bank loans, and most business owners want lower interest rates.
However the point with MCA is not to compete with bank financing as they both are in quite different areas. Apart from the fact that they are both funding businesses, the entire process, requirements, features and all other details related to funding are completely different.
The question with MCA loans is how to qualify small business loan does not really apply. Only in a very small number of cases are small businesses turned down by private lenders. Generally, most of the businesses get the money that they need for their business.
MCA Loan V/S Bank Loan
Merchant Cash Advances or MCA in short usually come with higher interest rates. Much more than what the bank offers, and this is because these are unsecured short term loans.
There are many businesses that will never qualify for a traditional bank loan, no matter how much they need or want it. Banks will reject their applications if they have a low credit score, or if they are unable to provide collateral. This is not to say that there aren’t many other grounds on which small business loan applications are denied by banks. Furthermore, banks are under no obligation to provide funds to those whom they do not choose. This leaves many small businesses with no other option.
MCA loans do not require much from a business in the form of a credit score and collateral. The basic criteria for MCA loan is mentioned here, which are as follows. The business must be at least 12 months old and in business. The business owner must not be in active bankruptcy at the time of the loan application. Lastly, the business must have a gross income of at least $10,000 per month.
The easier criteria make it easier to get an MCA, and the drawbacks are of course the interest rates and duration for some business owners. However, the people who cash in on this type of business funding are businesses that either do not have an option, or are in need of a quick business loan. Some benefits are processing time limits, which can be as little as a few days.
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