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Big Data Helping to Ease Commercial Lending Restrictions

When researching their What’s Your Business Worth, authors Daniel Priestley, Scott Gabehart and Michael Carter discovered that 67 percent of all businesses are under-financed.

This means that two thirds of businesses do not receive sufficient funding that would allow them to expand their business and increase their profits. When a business is underfinanced, the owner lives “hand-to-mouth,” a stressful daily existence. The thought of missing payroll–being incapable of paying workers with families to support–weighs on them. Commercial lending provides the capital to escape the merciless business-acquisition-and-billing treadmill.  

When you begin the commercial lending process with a financial institution, usually entrepreneurs and business owners will find they are asked two questions: What is your credit score, and what is your personal income? These are the same questions that a person applying for a personal loan would be asked as well, and highlights an outdated system that uses an incomplete benchmark process, which is a significant disadvantage for small business owners.

The bank uses your answer to those two questions as its primary way to determine how much capital they are willing to lend to a small business. However, these metrics to do not paint a complete picture of the businesses performance, nor how it is progressing. In order for commercial lenders to make better lending decisions and for the entire process to be fair for small businesses, this old methodology must be updated and take into account more than just the data included in a FICO score.

There is hope – improvement in big data has forced commercial lenders into holistic adaption. Commercial lenders have adopted this process in response to the demands of small business owners, and by incorporating more data and variables into their decision making, they have made lending faster and more efficient. Big data is transparent by nature, and this has benefited both borrowers and lenders. Borrowers have more information than ever and can see the terms other businesses have been able to secure, while lenders have reduced their risk by having a better understanding of the business due to a more complete evaluation process. Loan decision making that better represents the primary shareholders creditworthiness as well as the business valuation is a win for both parties.  

The commercial lending industry could be revolutionized if the banking sector is able to develop a more efficient way to allocate the supply of available funds to the demands and needs of small business owners. First Financial believes that in order for this to happen, there needs to be an updated lending act and data infrastructure for both small and midsize businesses. The amount of capital a business receives should correlate exactly with its value and future potential. The current regulations do not allow for this. They determine the creditworthiness of a business solely on risk and not on other important variables, such as potential. Reformed lending laws are needed in order to streamline and improve the commercial lending business.

Your First Business Loan: 7 Tips on Getting the Best One

borrower getting cash advance

 

Congratulations on considering getting your first business loan!

This step typically means you’ve been in business for a while, have sustained profits and are providing needed products or service to your community. You’ve beaten out 95% of other business owner wannabes!

Most likely, you’ve gotten here by taking careful, conservative steps. Continue your careful habits by researching the smartest ways to get your first business loan.

1. Understand Your Options

While you’ll certainly be grateful for receiving your first business loan, keep in mind that you’re providing valued business for a lender as well. Take the time to see how you can get the funds you need at the lowest rates and best terms.

Business financing comes in many forms: business loans, business credit cards, business line of credit and invoice factoring. Another instrument, the merchant advance is an early payment of the income you regularly receive through credit and debit cards. It’s typically a quick turnaround, paid back to the lender once those monthly funds come in. Understand the needs of your business and/or industry before you jump on the decision of getting a business loan.

2. Analyze Your Credit

A business’s credit rating dictate the interest rates of any loan you consider. Your business credit score and personal credit score both impact the lender’s decision. Personal credit scores indicate how well you handle money. Cash flow, expenses, and assets all figure in to how much a lender will approve and for what rate. The sources lenders use to determine your interest rate also vary. For example, Dun and Bradstreet will take nothing but your payment history. Experian and Equifax consider public records, legal filing and collection agency.
Those with a low credit score can get a business loan, but their options are limited.

3. Shore up Your Business Credit Score

Hopefully, you’ve avoided mixing your personal and business finances. Overlapping accounts complicate your business loan eligibility and even your taxes. The earlier you establish a separate business account, the better, as you build a business credit history this way.

4. Improve Your Credit Score Before You Apply

Review your credit report and settle all overdue bills. You can even consider consolidating your credit card balances into a personal loan, a move that impresses the credit bureaus and lenders because you’re paying off a higher level of the capital on a regular basis. The personal loan sends the signal that you aren’t looking to a bankruptcy filing to escape your debts.
Reducing your credit balances also improves your credit score, particularly if you use only 30% of the credit banks are willing to lend to you. Also, do not close an account just because you’ve paid it off. Keep that credit line open.

5. Make a Specific Request

When applying for a business loan, borrowers get farther when they know their numbers (as anyone who watches Shark Tank knows well.) Be ready to show the lender the figures behind just how much money you need to accomplish your goals and what those goals will do for the business. This is also where a thorough business plan can come in handy.

6. Study Financial Statements

Prepare the business’s income statement, balance sheet and statement of cash flow. After this you can prepare the documents like tax returns and financial statements. Lenders will demand all of these documents to determine whether you can pay the principle and interest over a period of time.

A+ Rated First Financial Specializes in Business Loans for ALL Credit Scores

Ready to get the money to hire a new employee, acquire crucial materials or open a new branch? Apply with First Financial for a business loan and a representative will contact you within 24 hours to answer all your questions. Our automated systems and lower marketing costs translate into lower rates and fees to the business borrower. We’re proud to provide the funds America’s small businesses need to propel the economic recovery and employ others.

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