Every week as SmallBizLady, I conduct interviews with experts on my Twitter talk show #SmallBizChat. The show takes place every Wednesday on Twitter from 8-9 pm ET. This is excerpted from my recent interview with Rohit Arora, CEO of Biz2Credit, is one of America’s top experts in small business lending and the use of FinTech to streamline the funding process. In 2011, he was among NYC’s “Top Entrepreneur” by Crain’s, which named Biz2Credit among NYC’s “Fast 50” of 2014 and 2016. For more info: www.biz2credit.com
SmallBizLady: Why are Mobile Platforms so important for small business lending?
Rohit Arora: The small business finance industry is simply reacting to the demands of the marketplace. Millennials want to do everything on their phones – from buying clothes to ordering pizza. It’s natural that they would want to conduct other types of business transactions via mobile devices. Today, 60 percent of the small business loan applications on Biz2Credit are input by mobile devices.
SmallBizLady: Are banks changing the way they conduct business?
Rohit Arora: Absolutely. The branch network is becoming outdated. Having lots of branches was for the longest time a huge advantage for larger banks with brand names. However, technology has changed things. Just as people under 30 may never have actually purchased a newspaper (they read it online instead), many of them have never set foot inside a bank branch other than to use an ATM. Now, increasingly, they can conduct business through online bill pay and other convenient options.
SmallBizLady: What has changed the most?
Rohit Arora: The big change comes from the consumer/borrower side. Data plans from phone/internet providers have become unlimited. There is no more data rationing, as was the case a few years ago. People are talking less and doing more things online. Phones are more powerful and the user interface is better. Additionally, there is the cultural change; people interact online and they want to conduct transactions using the freedom that the internet has given them. Google is ranking mobile friendly platforms higher. If you don’t make your site mobile friendly, Google will penalize you. It’s a huge shift.
SmallBizLady: How quickly did the finance industry adopt technology?
Rohit Arora: Small business finance was relatively slow in adopting technology as compared to other industries, such as retail. However, FinTech is booming. In the past, banks viewed FinTech startups as competitors. Now, increasingly, they are partners. Technology enables lenders to make informed decisions more quickly than ever before. Digital loan applications save on costs and they reduce the time spent filling out mountains of paper work.
SmallBizLady: What are my chances of getting a business loan today?
Rohit Arora: The good news is that small business lending is as strong as it has been in any period since the Great Recession. Nearly one-in-four loan applications from big banks ($10B+ assets) are granted. Lenders typically look for businesses that have been operating for 2-3 years and with a credit score above 650. Must have the ability to show a track record of operation, consistent financial performance and tax returns as evidence are helpful for receiving funding.
SmallBizLady: Does the government loan money to small businesses?
Rohit Arora: Small Business Administration (SBA) loans are very popular loans. While the SBA does not lend money directly, it provides a government backing that lessens a bank’s exposure to risk. SBA loans, granted typically by banks, come at very attractive interest rates and long repayments terms. This makes them more affordable to the small business owner. The only down side is that the government requires more paperwork as documentation, and this lengthens the time it takes for the loan to be approved (compared to a traditional bank loan).
SmallBizLady: What are my options if I have little or no credit history or a bad credit history?
Rohit Arora: Startups often raise money from family and friends, use credit cards (less advisable because of the high interest rates they charge) or borrow against the equity in their home. Other options include venture capital investment in return for a stake in the company. Non-bank lenders, such as cash advance companies and factors, provide revenue-based loans. While they typically make quick decisions, and are more willing to tolerate risk, the borrower pays a premium for this type of money.
SmallBizLady: How do I go find the best small business loan for my business?
Rohit Arora: Finding the best loan for your small business will require you to know what you’re coming to the table with. Before you start submitting applications, you’ll want to answer a few questions to help narrow things down. How long have you been operating? How much revenue do you generate annually and how much of that is profit & owner salary? Do you have collateral? What is your credit score? How much are you looking to borrow? What will those funds be used for? How quickly do you need funding?
SmallBizLady: Why is it important to review my finances before applying for a small business loan?
Rohit Arora: Applying for small business financing requires having the appropriate documentation to prove your firm’s creditworthiness. Have income tax returns, P&L statements, etc. as back-up documentation for your loan package. Getting the information ready in advance will cut down on the time it takes to submit your final loan application to a lender.
SmallBizLady: What types of interest rates are being charged?
Rohit Arora: Interest rates vary depending on a borrower’s credit history, the company’s recent financial performance, use of the loan, and type of loan. SBA loans can have interest rates as low as 4-5%, while credit cards may charge 19% or more. Non-bank lenders (ex: cash advance companies) can charge APRs that are as high as 30 to 40% for short-term funding. SBA loans and traditional bank loans typically are the most affordable types of small business financing.
SmallBizLady: How much do personal finances factor into small business borrowing?
Rohit Arora: Personal finances play an important role in small business borrowing — especially for startups and young, growing businesses. Credit score, personal debt to income ratio, and net worth all weigh heavily on an underwriter’s lending decision. If you expect you’ll need to borrow for your business, it makes sense to give your personal finance a checkup.
There are a number of ways to increase your credit score if it is low. Begin paying bills on time and in full, pay off high interest debt first in order to cut down on cost of capital. Be sure to watch your costs and run “lean and mean” to improve your company’s cash flow. If possible, consolidate high cost debt under a low interest credit card or through a business line of credit.
SmallBizLady: How much should a small business borrow?
Rohit Arora: Be sure to borrow enough. If you have extra left over, you can use it to begin paying down debt. Again, it is critical to understand cost structures and too leave some cushion in the event of unforeseen delays, downturns and disasters.
Loan sizes can be micro loans of less than $50,000 to larger loans of $2 million or more, based on the use of funds, type of industry, track record of the company and other factors. Biz2Credit offers a free BizAnalyzer Tool that can help entrepreneurs understand their financial situation better.
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