The first business of Alibaba Group, Alibaba.com is the leading platform for global wholesale trade serving millions of buyers and suppliers around the world.
Through Alibaba.com, small businesses can sell their products to companies in other countries.
Sellers on Alibaba.com are typically manufacturers and distributors based in China and other manufacturing countries such as India, Pakistan, the United States and Japan.
If I asked you, “What do you need most to help your business grow?” my guess would be many of you would say, money. That’s not surprising, of course, but unfortunately, money is not all that easy to come by—even if your business is successful. That fact is what led serial entrepreneur Jared Hecht to start Fundera, an online marketplace that connects entrepreneurs with alternative lenders. Hecht, the company’s CEO, decided to launch Fundera after a relative had a problem getting a bank loan, despite owning a successful company.
Rieva Lesonsky: First, let’s talk traditional loans. How hard is it for business owners to get a loan from a bank? Should they even bother?
Jared Hecht: The short answer is—it’s very hard for a business owner to get a loan. At Fundera we usually qualify that by saying if you are a small business that does less than $5,000,000 in annual revenue, it is very difficult. Decline rates at banks can get as high as 80%. Small businesses have been hit hard since the recession when banks began to tighten their lending requirements, and the economy saw a significant contraction in bank loans to small businesses. Unfortunately, in a recession, small business is usually the first to get hit and the last to recover.
That doesn’t mean small businesses should ignore the banks. Banks will consistently provide the best rates out there for traditional loans and lines of credit. The one thing to keep in mind is the incredibly high opportunity cost of applying for a traditional bank loan. Studies show it takes a minimum of 24 hours to apply for a bank loan and gather all the documentation one needs.
That’s a full day of life to just get an application ready. Then it can take months of back and forth until funding. If expediency is a priority, it’s hard to come by at a bank. But if lowest interest rates are most important, nothing will beat the bank.
Lesonsky: Are community banks better?
Hecht: If you have an existing relationship with a community bank, they’re a great option. The fact they know you and can have a better idea of your risk-profile is a huge advantage.
Lesonsky: What do banks look for before they’ll make the loan? Credit score? Years in business?
Hecht: Credit score is important because they want to see if you have any bankruptcies, liens, judgments…anything that could be a red flag.
Time in business is also important because they want to have enough history to be able to really see how you perform financially. Showing you’ve been able to successfully stay open for years indicates that you are (most likely) making wise financial decisions and are a safer bet.
Also important are any documents that can indicate your cash flow and your revenue. They want to know you can or at least have the potential to make enough money to pay them back. They also want to know that you are responsible with your money and won’t let your cash burn impact repayments.
Lesonsky: Is it easier for retailers to get a loan, since they can use inventory as collateral?
Hecht: In some ways, yes. But if the business has bad credit or a rough financial history, it won’t make a difference. I think the important thing to recognize here is collateral. Any business with inventory has an advantage since they’ll have collateral, but so do the businesses that own expensive equipment. It’s important to think about what you could use as collateral in your business, so [lenders] won’t need to look at your personal assets.
Lesonsky: What are some non-traditional lending choices entrepreneurs should look into?
Hecht: If a business has larger receivables on their books, they should definitely consider invoice factoring. It’s a great way to get more affordable capital, especially if you have not-so-stellar credit. Factors are evaluating your customer’s ability to pay, not yours.
SBA loans are a great option as well, given that the SBA (Small Business Administration) backs the business, helping their chances of getting a loan that has lower interest rates.
Over the past several years there has emerged a crop of online lenders that are filling a huge gap where the banks are not lending. Companies like Funding Circle, OnDeck, and Lending Club are using technology to provide better access to capital for small business owners.
Last, if you need a loan to purchase equipment, equipment financing is a great option as the equipment can serve as the collateral.
Lesonsky: So what are the chances of getting an SBA-backed loan?
Hecht: It all depends on your business. Your chances are certainly better than [getting] a traditional loan, thanks to the SBA backing the loan, but the larger the loan amount, the harder it will be to qualify. Having strong personal credit and a profitable business will increase your chances. Any paperwork you can show that indicates good payment habits, like how you repeatedly pay down your credit card, can also be valuable here.
Be prepared that an SBA loan requires a lot of paperwork. For a quick loan, it is not the best option. If you want the lowest rates though, and can’t get a traditional bank loan, an SBA loan could be the way to go.
Lesonsky: Are there any no-no’s? Like credit card advances?
Hecht: It’s hard to say because so much of it depends on the position you’re in. Credit card advances are going to cost you a lot, but if you have bad credit and need cash fast, they may be your best bet. Not to mention, with Square and PayPal getting into the space, credit card advances are becoming a more reasonable and less-costly option.
I’d say the biggest no-no would be not running a responsible process, understanding your options, and giving yourself time to find the right product and best rates. Non-traditional lending options can vary tremendously in price, so you want to be positive you are getting the best terms possible.
Lesonsky: Are lenders more reticent to lend money to businesses that are ordering inventory from China and other developing nations?
Hecht: I think the only time this matters is when the inventory is being used as collateral. If the business goes under, the lender is going to have to collect on inventory that could be on the other side of the globe. Also, it’s sometimes harder to appraise the value of this inventory because you have to take in freight, duties, and more.