Advising your clients on the new world of small business financing
The number of small business owners expected to take an online or alternative loan could double in the coming years, and some of them are likely to be your clients.
While there is a broad range of business loan options available today, the trade-offs and costs associated with those options vary from lender to lender. Evaluating the differences between lenders and can be confusing—the wrong financing choice can hurt your client’s business in the long run.
OnDeck, a leading small business lender dedicated to changing the way small business owners’ access capital, has delivered over $4 billion to small business owners since 2007.
OnDeck approaches small business lending in a new way. It looks beyond a single-minded focus on personal credit, collateral, and other traditional metrics, and identifies ways to evaluate potential borrowers based upon information that helps assess the health of the business and its ability to service debt.
Instead of the traditionally weeks-long process a bank takes to review and approve a small business loan, small business borrowers are now going online. The loan application process is straightforward with funding in as fast as one business day for approved applicants. Some businesses are getting an answer on their applications within hours. The process for many online lenders is faster, less painful, and more convenient for the business owner than traditional approaches.
You’re in a position to help clients navigate this maze of new options. Understanding how to evaluate those choices becomes increasingly important in order to help your client borrow wisely.
Advising your clients
The bank is still a good option in some circumstances, but it’s not the only option. Nor is it the one-size-fits-all solution it might have been 30 years ago.
There are many situations where traditional financing options just don’t work. With that in mind, here are three questions to help you and your clients determine the best fit for their situation.
1. What is the purpose of the loan?
If your client has an opportunity to purchase inventory at a discount, but needs to borrow funds to do it, the total interest cost of the loan might be the key metric to help determine whether or not the financing makes sense.
The loan purpose should influence the term. In the above example, it might not make sense to borrow with a term of four or five years to purchase inventory that will turn over within a few months. A short-term business loan might make more sense, and have a lower total cost than a long-term loan.
2. How much does your client need to borrow?
The loan amount may help identify where to look for finance.
For example, many banks would rather lend $500,000 or $1 million instead of $10,000 or even $150,000—it’s just too expensive for them to accommodate the lower loan amounts. However, with streamlined application and approval processes, online lenders may be better positioned to offer those types of loans.
3. What does your client’s credit profile look like?
A less-than-perfect personal score doesn’t rule out financing for an otherwise healthy business. Business owners’ personal credit score really isn’t the best proxy of a business’ creditworthiness. A healthy business with cash flow to support regular periodic payments is a better measure.
Determining the right financing requires more than comparing interest rates. Loan term, total cost, the business’s credit profile, and the total health of the business are all factors that identify the type of financing that makes the most sense given a particular business use-case.
These three questions will help you and your clients evaluate options and choose the financing that will likely be the best fit.