As the old saying goes, the only guarantees in life are death and taxes. Small business loan providers like to advertise guaranteed approval for their loans, but reading the fine details makes it clear this is far from the case.
Guaranteed Business Loans Is Real
Perhaps a more appropriate form of advertising would be along the lines of (almost) guaranteed approval, but for exceptional clients. For everyone else, we will let you know.
As accurate as this moto might be, it certainly doesn’t sound appealing. But at least it is honest. The myth of guaranteed business loans is exactly that: a myth. At the end of the day, guaranteed business loans are a poor business idea.
The Simple Guide To Understanding Small Business Loan Applications
Suppose your friend needs to borrow $25,000 for their small business and you want to help out. Being the good person that you are, you accept upfront one of two scenarios will play out.
First, you will either recoup your $25,000 plus a reasonable amount of interest. Or, you won’t see that money ever again.
Now, this is a scenario that is very common. You are just looking to help out a friend and you aren’t running a bad credit business loan company charging unnecessarily large fees.
What if instead of one friend asking to borrow money, your cousin and neighbor each wants to borrow money for their business but you only have $25,000 to lend out to one recipient?
If you want to take advantage of this opportunity and make a bit of money through interest, your odds of success are now higher by default of your ability to be more selective.
If your friend’s business is just getting started and has yet to generate sales, the chances of this being a bad business loan are high.
Your cousin’s business is well established although you know first-hand they are losing clients to a larger competitor. The odds of the loan being repaid are higher, but perhaps not that great.
But your neighbor has a booming business and was more than happy to show its accounts receivable. You know that a major sale is set to close in one month and this will be more than enough to repay the loan in full plus interest.
So which of the three scenarios sounds most enticing? The business owner that can prove the loan can be repaid quickly is the no-brainer choice.
For these entrepreneurs and these ones only, guaranteed business loans are a very real possibility — although still not 100% guaranteed.
Lenders Evaluate These Factors
Once a business owner applies for a small business loan, the lender will evaluate their ability to pay back based on multiple factors, perhaps the most important of which is cash flow and expected cash flow.
Another important consideration is the owner’s credit history — a statistical measure of a person’s ability to pay back loans.
The evaluation process is mostly automated and makes use of advanced technology like artificial intelligence and big data to reach a decision.
This is the most important step in the business loan approval process as lenders open themselves up to tremendous risk if their internal controls aren’t immaculate.
Companies with little to no business history and sales run by entrepreneurs with poor history are likely to be declined. There are some lenders that cater specifically to this scenario by providing bad credit business loans.
But it could come at high-interest rates which makes it a poor, albeit perhaps necessary option. Fortunately, there are many tips and strategies for business owners to improve their credit score to have a better chance of avoiding a bad credit business loan.
Those with strong business and verifiable cash flow streams that are backed by entrepreneurs with strong credit scores are ideal customers for guaranteed business loans.
What Happens When The Good And Bad Collide?
But what about applications with a mix of positive and negative attributes? Suppose a highly successful business owner has a very poor credit score, perhaps stemming from their early days of running a company when it was just getting started.
Would this be classified as a bad credit business loan?
The answer isn’t simple and may depend on the lender’s internal requirements. For some small business loan lenders, a personal credit score of 500 would be enough for a loan to pass through.
Other providers might take a more conservative approach and decline an application for anyone with a credit score under 680.
And then under the last scenario, we have a business owner with a stellar credit score but a business that has yet to take off. Similar to the example above, the answer depends on the lender’s internal systems.
But as a general rule, it is safe to say that regardless of credit score or how successful a business is on paper, if a lender isn’t confident it will recoup its money then it just won’t lend it in the first place. While not as simple and straightforward as that, it likely is pretty close.
Bottom Line: A Very Competitive Industry
The small business lending industry in 2021 is very competitive and features both legacy banks and new-age financial technology companies.
This creates an environment where several firms are looking to establish themselves within a particular niche, such as targeting businesses with less than stellar performance. The bad credit business loan segment is very risky so there will be fewer firms competing in the space.
Businesses with exceptional performance and backed by owners with strong credit are the ideal client for lenders that advertise guaranteed business loans for established businesses. This means that businesses will be able to shop around for the best available rate.
As is always the case, it is best to shop around at various lenders to find one that best suits your individual needs. Chances are more than one small business lender will suit your needs.
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