Business Buzz: Banks vs. Alternative Lenders
So you have been brave enough to venture into your own business or are on the verge – Good for you – being an entrepreneur takes guts!
Now you have to figure out how to finance your business as you “start-up” or grow. Other than the famous three “F’s” – Friends, Family and Fools – there are basically two types of lenders that provide financing for inventory, equipment, materials, and the like – Banks and Alternative Lenders. Both require that you demonstrate your ability to repay the debt – because regardless of your passion, great ideas and willingness to work hard – there is risk in any business. Those that lend you money have to be sure that they will get repaid.
Banks are going to have more stringent and conservative credit requirements because they are regulated by the government, so for many early stage businesses, Alternative Lenders can provide an excellent option. Alternative Lenders are typically not for profit loan funds, often affiliated with the US Small Business Administration, whose mission is to provide loan capital for small businesses that mainstream lenders do not provide. While Alternative Lenders will also have specific credit and other underwriting requirements, they are somewhat more flexible and will work hard with business owners to try to find a way to finance the business.
Whether a Bank or an Alternative Lender, the best way to start the application process is be armed with the information your lender is likely to need and to understand the content of the information/documents. Below is a list of the information and documents you should have in hand:
- A FICO Credit Score (you can get yours on www.myfico.com) which evaluates and rates your current and past usage of credit, such as whether you have been paying your bills on time and how much debt you already have. Most banks are looking for scores above 650.
- A strong, well thought out Business Plan. The Business Plan does not need to be lengthy, but it does need to be well thought out. If you need help writing your plan, check with your local Small Business Development Centers for assistance.
- Tax Returns (for at least two years back) Personal returns if you are a start up – both business and personal if you have been in business for a while.
- Cash Flow Projections for the next year or two
- Business formation documents
- Bank Statements
Each lender will have their own specific list – but the above items are standard – every lender will require them. Although this may seem like a long list, remember keeping your paperwork in order (tax returns and bank statements) demonstrates that you are serious about “managing” the financial aspects of your business and therefore are a better risk to a Lender.
Additionally, you need to be able to demonstrate that you have a source of current income (if you are starting a business – think about keeping your current job until the business if off and running) AND collateral (a house, cars, bank accounts) or that the purpose of the loan for which you are applying will result in collateral (purchase of equipment or inventory) so that if you don’t make your loan payments, the Lender can sell the collateral and use the proceeds to pay down your loan.
Above all – Root for yourself – Being a Business Owner is challenging and a lot of hard work- 24/7- but the rewards of “creating something” are AWESOME!
If you would like to speak with Holly Perlowitz, CPA and Business Development Manager at Community Capital New York, an alternative lender in the Hudson Valley, please call her at 914-747-8020 Ext 14 or her Associate Simone Obermaier, Underwriting Manager at 914-747-8020 Ext 10. Holly and Simone are experts at helping small business get the financing they need.
Adam has worked in the local news industry for the past two decades in Westchester County and the broader Hudson Valley. Read more from Adam’s author bio here.