Whether due to a lack of funds to add inventory or to buy new equipment, many small businesses find themselves in need of additional capital.
While some small businesses try to scrape by with what they have, others look to banks, alternative lenders or the government for a quick infusion of cash.
For those looking for added funding, there is no shortage of places to turn. Traditional banks, nontraditional lenders and the Small Business Administration, via its loan program, all offer small businesses access to additional capital. Then you must decipher which lender will serve you best, and which will give you the greatest chance of success. [Looking for a business loan? Check out our reviews and best picks.]
As the head of small business lending and decision sciences at Capital One, Iskender Eguz has a ton of insight into the various loan options and what it takes to secure one.
Eguz has more than 15 years of experience in advanced analytics, strategy development, valuations, marketing and credit risk management. In his current role, he leads all aspects of Capital One's small business and business banking lending, including P&L and credit risk management, valuations and pricing, underwriting and portfolio management, data science, product development, and technology investments.
We recently had the chance to speak with Eguz about the various lending options, the types of loans available, how to apply for one and what mistakes to avoid throughout the process.
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Applying for a loan
Q: What should small business owners do to prepare for applying for a loan?
A: As you prepare to apply for a business loan, you should keep the five C's of credit, a common lending framework, in mind. The five C's are capacity, capital, collateral, conditions and character.
- The underlying business or the business plan should have the capacity to generate enough cash flow to pay back its debt obligations, while absorbing unexpected expenses or changing conditions in the economy or industry.
- The character, or who the small business owner is, is critical. Not only whether you have the expertise to be successful in your business, but also your personal credit history demonstrating evidence of meeting prior debt obligations is important.
- Finally, how much personal investment or money you are putting in your business (capital) and whether you would offer anything as security for the loan (collateral) shows your commitment to the business and can influence ability to get approved.
It's important you know your business well and are ready to have an open discussion about your business's circumstances along these dimensions so that the banker can structure the best products for your needs.
Q: When applying for a loan, do lenders consider your business's financial status, your personal financial status or both?
A: Lenders typically consider the five C's of credit for both the business and the owner, though the emphasis on different aspects may change based on the purpose, size, term and structure of the loan. Every case is unique, and lenders often price and structure loans on an individual basis – taking into account the business's circumstances, as well as our relationship with and knowledge of the business.
Q: What are the most common mistakes small business owners make when applying for a small business loan, and how can they avoid them?
A: A common mistake we see is business owners not partnering with their banker. It's important to openly discuss your plans, opportunities and risks you see so they can help you structure what product or products would best meet your needs.
A lot of business owners either under- or overestimate how much borrowing they will need. Business owners might need a mix of term loans for investment, as well as lines of credit that support their ongoing growth.
Sometimes, Small Business Administration (SBA) loans might be the right answer, giving customers extended terms they need that they might not otherwise qualify for. Having an open dialogue about where the company is going can help you understand what makes the most sense for your business.
Q: What are the pros and cons of applying for loans from traditional banks versus alternative lenders?
A: Alternative lenders have gained popularity in the marketplace but are not transparent on the total cost of the loan. When you factor in payback schedules and fixed versus variable interest rates, we've found that most small business owners end up paying considerably more for a nontraditional loan then a traditional bank loan.
Types of small business loans
Q: How do you know if your business is best suited for a term loan versus a line of credit?
A: In general, term loans are best suited for specific investments a business is considering, while lines of credit are helpful with managing the cash flow cycle. Of course, each business has a unique situation, and we work closely with our customers to understand all of their capital and financing needs so we can respond efficiently and help structure what product or products would best meet their needs.
Q: Do all loans require you to put up collateral? What are some examples of collateral that a business can put up?
A: Not all loans require collateral. It depends on the size of the request and the financial strength of the business. Loans under $100,000 can be unsecured (without collateral), but larger loans are typically secured by some type of collateral.
The type of collateral varies depending on the purpose of the loan. For example, if the loan is to finance real estate or machinery, the collateral would be the subject asset.
The most common collateral for lines of credit and term loan is a UCC lien on all business assets. Other types of collateral can be cash or marketable securities held in the financial institution, investment real estate, and other types of tangible assets.
When a customer does not have collateral needed to secure a loan, SBA loans can be a great alternative. Our bankers help our customers determine the best loan structures based on their unique situation and goals.
Q: How should you best determine if the loan terms make fiscal sense for your business?
A: Like most other business decisions, business owners should consider the cost of the debt against the returns they expect from investing that money in their business. They should also ensure that they have sufficient cash flow or other financial buffer[s] that will allow them to service their debt payments through the ups and downs that naturally occur in a business cycle, without putting extra burden on the business.
As mentioned previously, it's important that business owners meet with their bankers to discuss their plans, opportunities and risks. Our bankers help our customers structure a loan that makes the most sense for their business, looking at their revenue and expenses in the past and present, as well as what is expected in the future.
Q: What piece of technology could you not live without?
A: Who lives without their smartphones these days? I am also amazed how many more things I am starting to ask Alexa at home these days.
Q: What is the best piece of career advice you have ever been given?
A: No work is worth doing if you are not excited about it. Also, make sure you are working with people that you believe in and that believe in you.
Q: What's the best book or blog you've read recently?
A: It's a couple years old now, but Homo Deus: A Brief History of Tomorrow, by Yuval Noah Harari, was a cool sequel to Sapiens: A Brief History of Humankind. Both books have an engaging flow, looking back at the history of humans, and the second book adds trends in technology and conjectures of future that is cool.
I am a big follower of tech blogs, with Engadget and TechCrunch being my top daily stops. The merging of tech trends with history is probably what made Homo Deus a fun read for me.
Q: What's the biggest risk you've taken professionally? Did it pay off?
A: I have never been afraid to try something new and speak my truth wherever I go. At Capital One, I have worked in various roles, many times switching to doing things in which I have no prior experience. It absolutely has paid off. The humility and learning mindset that comes with it is unparalleled and frankly addictive. You find more doors open than not, if you are willing to look for them and step through.