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Inside the Mind of the Bank: 4 Factors Affecting a Small Business Loan

Ricky Nila

When the Great Recession hit in 2007-2008 traditional banks and credit unions changed their lending standards. 

They made it very difficult for small business owners to get funding.

Alternative lenders stepped in to fill the void. They helped small business owners when the banks would not. We took a look at the 4 factors alternative lenders use to provide small business owners with the funding.

1. Credit Score 

As a small business owner it is important to keep your personal credit score as high as possible. Small business loans take into consideration the personal credit score of any business owner with 20 percent or more interest in the company. With todays alternative lenders, a borrower can get a loan with a credit score as low as 500. The best rates will be given to borrowers who have a credit score of 720 or higher.

Borrowers with high credit scores can typically go into their local bank and qualify for a loan. Many still choose to use an alternative lender. This is due to the ease and speed of funding. Before alternative lenders became prevalent in the market place, small business owners without high credit were unable to get funding for their business. Today the same business owners can find funds.

Loans for low credit borrowers are usually in the form of an Automated Clearing House (ACH) or Merchant Cash Advance (MCA). The loans are based on the monthly revenue of the business bank account or merchant processing account. These types of loans tend to come at a high cost to the borrower. With rates has high as 80 percent APR.

Keep in mind when taking an ACH or Merchant Cash advance no matter how good your credit is you will still be paying a high rate. These types of funding should only be used as a last resort or if funds are needed immediately (within 24 to 72 hours) due to there flexibility and can be paid back quickly.

Editor's Note: Looking for business loan? If you're looking for information to help you choose the one that's right for you, use the questionnaire below to have, provide you with information from a variety of lenders for free:

2. Time in Business 

A business that has been operating for less then two years is considered a start-up. Start-ups generally are not eligible for a traditional bank loan. Banks typically require businesses to be operational a minimum of  two years before they will lend to them.

The alternative lending market place has changed the standard. Businesses that have been operating for at least three to four months can now get funding. The amount of money provided is based off the businesses monthly revenue.

The longer your business has been operating the more loan options available to them. A business that has been operational for more than two years will have the best chance at getting funding. These funds can be at a lower cost. After the two-year mark businesses will be eligible for more traditional structured term loans. 

Businesses that have been operating less then two years will pay a higher APR. These small businesses are considered high risk and have limited options to choose from. Ideally you do not want to have to borrow money in your first two years of business. This will help you avoid paying a premium for any money borrowed.

If you must borrow funds, make sure the high cost will not hinder your operations from low monthly cash flow due to paying back the funds.

3. Monthly Revenue

Small businesses owners that have been operational less then two years need to be generating monthly revenue of $5,000 to qualify for funding.  The funds that are available to them during this point in their businesses life will be based off their monthly revenue. Generating that amount of revenue does not necessarily mean you will get the money.

The average daily balance of your business bank account will determine how much money can actually be provided to you and paid over a period of time.

For example:

  • Let's say you need $5,000 and your monthly revenue is $7,500 over the last three months.
  • You applied for funding from an ACH/MCA lender. They are going to take out 21 daily payments/month from you business bank account. They offer you a factor rate of 1.49 for a six-month term.
  • Funding = $5,000
  • Factor Rate = 1.49
  • Payback Amount = $5,000 X 1.49 = $7,450
  • Daily Payment = approx. $59.13
  • Total Monthly Payments = approx. $1,241.73

Any business in this scenario that is maintaining an average daily balance under the total monthly payment amount, would not qualify for the amount they are looking for. They would be offered a lower amount in which they would be able to maintain the monthly payback amount.

Note: This is a hypothetical scenario to give some insight into how these types of loans work. There are various factors that are considered when applying for funding. This scenario should not be taken as the exact process for any lender.

4. Collateral

There are several types of collateral that can be used to help you get a loan. The type of collateral will depend on the type of loan you qualify for.


Deposits based on your business bank account or merchant processing account. This is one of the few options new businesses have. This option can be used for any business whether it is a start-up or seasoned business.

Home Equity

If you own your home, and it has any equity it in, it can be accessed with a home equity line of credit. You can also refinance your home and take cash out up to the maximum loan to value allowed by the lender.

Investment Real Estate

Sell the property or refinance it to access the equity. Home equity lines of credit are typically not offered on investment properties and hard to come by.


Business owned equipment could be leveraged to access funds. There are several equipment-leasing companies that offer a sale-lease-back on owned equipment.

This requires you to sell your equipment to the equipment leasing company. The company provides the business with a lump sum. The company will lease back the equipment to the business with it never leaving the businesses possession. After the leasing period ends the company will own the equipment again.

Collateral is used to make the lender comfortable with providing a loan knowing that if they need to liquidate the collateral they will get some money back. It also helps keep borrowers accountable to pay back their loans. 

Today’s Market

In today’s small business lending marketplace, it has become easier than ever to get the funding you need for you business. It no longer really matters what situation you find yourself in, there is an alternative lender out there that can cater to your needs. Remember that just because the funding is available does not necessarily mean that the cost of the funds is always going to be ideal.

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Ricky Nila Member
Ricky is the CEO and Founder of Lending Attic a nation wide commercial lender. He specializes in making a complicated process seamless. His company is a one stop shop offering various types of lending for small businesses and commercial real estate financing.