You may have noticed that banks have begun making their business loan products more competitive. In previous decades, virtually every bank loan required mountains of paperwork as well as collateral. Applicants had to wait several months to be approved and possibly even longer to receive funding. But over the past few years, an increasing amount of banks have made their application process for certain products much easier. You don’t need collateral, and the application can be completed very quickly. It could then take as little as 24 hours for funding to be distributed. This gives the impression that banks are finally becoming less risk-averse.
But there’s a catch. While banks might be opening their doors to more applicants, they are apparently resorting to another tactic to mitigate the heightened risk: short funding. Many recent bank loan applicants have reported being approved for significantly less money than they requested.
Here’s why this is happening, and what to do next:
It appears that short funding is a somewhat “hidden” way for banks to entice more potential applicants. Other business lenders have been known to do the same thing. It seems like they are approving more applicants when they actually aren’t approving the application that was originally filed. Odds are, what they are really doing is approving the application just so they can say that they technically have raised their approval rate. But what good are these approvals if the amounts are nowhere near sufficient for the applicants’ needs?
Accepting less money than your business requires can be just as dangerous as accepting too much money. You will likely have to supplement the missing funds with your own, making you increasingly vulnerable to a host of serious problems in the future. After all, you saved this money for a reason. Combining a decent portion of your own funds with borrowed funds also makes an accurate ROI much harder to calculate since you are essentially taking money away from other elements of your business.
If you’re wondering why banks can’t just approve borrowers for their requested amounts, the answer is likely the same as if you were to ask why bank loans have traditionally been so inaccessible in the first place. The only bank loan applicants who get approved for their requested amounts have perfect credit scores, have been in business for at least 2-3 years, and are involved in thriving industries. In the eyes of the bank, failing to fulfill either requirement makes you too “risky” to handle the full amount you requested.
A great deal of bank loan applicants would probably claim that the bank is hoping that this tactic persuades applicants to not accept the money they are offered. Short funding might also allow the bank to assign shorter terms and larger monthly payments. The bank would therefore make more money at a faster rate.
Getting short funded by your local bank does not mean you’ll see the same result with another business lender. At United Capital Source, we typically do not short fund applicants solely because of flaws related to credit score, capitalization, time in business, or industry. If we were to short fund an applicant, it would only be because he or she requested an undeniably excessive amount. So, as long as the amount you request is reasonable and supported by evidence, you can expect to get exactly what you need to stabilize and/or grow your business.
Many recent clients of UCS were short funded by banks but were smart enough to not bring their own funds into the equation. Instead, they contacted UCS to ask if we would provide the additional funding. We are proud to say that approving these new clients has been an extremely successful initiative thus far. Unlike commercial banks, we have no issue with approving smaller amounts. And that goes for applicants who were short funded by other business lenders as well, not just banks. If you feel the offer you received from an online business lender (Kabbage, PayPal, Square Capital, etc) is not sufficient, there’s a good chance UCS will be able to help.
Online business lenders may short fund applicants because their algorithms detect a discrepancy with cash flow. All small business loans approved by UCS, on the other hand, are overseen by living, breathing human beings. Uncontrollable circumstances like seasonality or rising operational expenses may cause rough patches but are often not an indication of an overall decline in revenue. Our ability to understand the nature of these circumstances prevents unnecessary short funding or rejections.
As competitive as bank loans have become, it’s important to remember that in some regards, banks will always be banks. Their business loans will probably always be most difficult to manage and obtain, and the bank likes it that way. So, while disappointed bank loan applicants most certainly have the right to be upset, they shouldn’t really be surprised.
At UCS, there’s just too many alternatives to short funding. We could offer you a different business funding program, or slightly adjust your terms. And we are realistic about costs because unlike the bank, our number one goal isn’t to draw a profit. Our number one goal is for you to achieve long-term growth. This is only possible with sufficient funding, and we’re experienced enough to know what’s enough and what’s not.
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