The initial limit most banks floated to me was 10% of top-line revenue, but once they heard what topline revenue was (low to mid 6 figures), they generally suggested withdrawing the application and getting a credit card issued instead. I believe this is primarily because they thought it was unprofitable to underwrite the line of credit rather than an early denial for probable credit risk.
I ended up with ~$200k available on credit cards but couldn't get a line of credit through a traditional lender. Since I needed one, I ended up getting it through OnDeck, which charged 36% APRs. While I was not thrilled about that number, at all, it protected me from having to raid family finances to support the business several times.
(This product theoretically exists in Japan, too, but is extremely hard to access for SMBs without hard collateral like real estate to lend against.)
You hit the nail on the head with regards to why banks don't like "small" loans. It costs them almost as much to underwrite a $10 mil loan as a $100k loan, so they know which of the two they prefer.
Online lenders have automated much of the underwriting process so the main cost is actually CAC rather then staff overhead.
Loans are generally designed to be recoverable (requiring personal guarantees, assets, etc) so even in case of defaults lenders will recover most of their money (recoverability is also the reason it's normally capped at 10%-20%)
However with fraud the chance of recovery is essentially zero, so fraud is typically what blows up lending books.
With small businesses it's often hard to distinguish legitimate business from fraud and that's the real bottleneck.
The small business goes to OnDeck + 6 others companies and gets loans at the same time. OnDeck can't see these other loans because it takes a while for them to show up in reporting. This is technically fraud (the loan contracts say you can't do this), but most of the time, the intent of the business owner is not to outright steal. Usually they are deep in the hole and trying a last ditch effort to get their business on its feet.
When OnDeck approved the business, they approved them based on the ability to repay 1 loan. Naturally, adding so many more loans is much more likely to lead to default on the insane payments. And because there's 6 creditors, each get pennies.
Lenders need to see bank accounts and transaction histories (last 6 months, at least). With transaction records, along with accounting records, it's a fairly straightforward data science task to determine a) whether you are seeing the entire cash picture and b) whether the business has other loans. One should also get tax returns; with those and accounting data one can make a good guess at whether c) the business is just making up numbers when it comes to their operations.
There are a ton of ways to get loans or lines of credit.
In Canada (and there are probably equivalents in your country) there is:
The Business Development Bank which is government backed and will lend to riskier businesses. I have taken advantage of it. It will not take on risk like a VC but if you are already profitable, it can help you grow. I've done this to a large extent as the interest is often prime + 4% which is generally amazing.
The Export Development Canada which is a bank that will fund export oriented projects. You need a contract and they will advance you the expected payments.
There are high interest ways of factoring accounts receivable, but the interest rates can be quite high. I've never done that as I can not justify +30% interest rates.
True lines of credit are hard to achieve from a standard bank as they will want collateral that they can seize if you run into trouble. I have a software company so I never had true collateral, thus I couldn't get a true line of credit.
Lastly, there is the possibility to use VISA and personal lines of credit that are tied to your assets. Just be careful that you do not screw up and put your hard earned assets at risk.
Also this seems to be realistic: https://www.svb.com/blogs/alex-mccracken/guide-to-financing-...
EDC will finance a whole export contract you have up to millions based on the client being teputable and the export contract being legit.
Personal personally backed Visa usually are in the range of 5k to 30k range. Personally backed line of credit is usually up to 70% of your paid off mortage value.
Kabbage was fairly easy for $50,000; 18 month term loan around 19%. Fundation was fairly easy for around $100,000 for 18-months at 13%. Able Lending was an involved process for $500,000. That was a 36-month term loan at roughly 16%.
Since we can point to some months of profitability, significant capital expense in the form of R&D, and consistent cash flow, an SBA loan (in the USA) is a possibility now. The interest rate is under 10%, the term length is 7 years (?) for working capital (25 years for real estate). That's really the best deal in town, if you qualify. It's not that hard to qualify, as long as you are not just starting out.
I've also borrowed $250,000 from a supplier. That was a pain in the ass, but was critical to staying alive. In all cases, I've had to personally guarantee the debt.
It was easier (and better imho) than getting an investor. Bank did not meddle in our business, just took interest (if we could pay it; it compounded for 3 years if I remember correctly).
If profits are very high, sales are very high and the fixed costs are low, the missing part of the equation is payment terms. Abuse them. The distributors aren't going to go out of business if you pay them from your own profits on them. You will be the one to go out of business, if you try to get credit or factor it instead. Then they don't get any reorders from you. I really wish I had known this.
At the time, I had the perspective you just stated, and I thought large suppliers had the same perspective. they don't. (as the other reply to you stated.)
In my case both of my clients failed to pay routine invoices, which lead to my being late with a single payment on the LOC. The day after I paid (albeit the bare minimum), the lender closed the LOC and my affiliated credit cards and demanded repayment of all outstanding debt. I ended up digging into my IRA to clear the debt as prospective clients were calling out the debt as a reason not to hire me.
I had relied on the LOC to smooth out month–to–month invoice zaniness with client purchasing departments. It had never been a problem until 4Q2008 and then it was a critical problem.
One of the two clients never paid, the other paid about six months into 2009.
I refuse to float clients any more and require all hardware to be paid for before I buy it or purchased/leased directly by the company.
Took me over a decade to clean up the hit to my personal finances and credit rating.
I would just say that the time to get a line of credit is when things are going well. When you've got plenty of cash on hand and regular payments into your account from customers (or investors I suppose), that is the time to ask the bank for an overdraft facility / line of credit. The worst time to ask is when you need it.
In hindsight I'd say get one even if you never anticipate needing to use it. (As far as I know an overdraft which you don't use is free.)
The founder told me that they were lucky because if the customer would have wanted even more expensive hardware but the bank wouldn't want to lend the needed amount of money that would be a problem. Also timing was important for contract signing, securing the loan, getting the hardware and installing it.
It increases the cash available in a non-dilutive way, and has been cheaper than factoring and other such tools offered to startups. “Small business” deals are usually terrible — basically credit card deals.
If you raise the line and then manage to your original plan you can consider the debt an insurance policy in case things take longer than expected or some assumptions are a little wrong (if they are a lot wrong change your plan!).
Commercial lending typically factors in the current business revenues (or receivables). You should have a few lenders able to offer the business a line of credit, capped at about 100-200% of your average monthly deposits.
You could demonstrate that for an underwriter by providing either your most recent three months bank statements or a tax return. Personal credit of the owners will be reviewed, unless the business has comparable borrowing history.
Right. One of the major hardware firms sold me ~$30K of gear. As I recall, it was five years at 0% interest.
Edit: That being when partners got their distributions.
It can be you if you have property or assets, it can be your parents, friends etc. with assets. If you can't pay the loan, they will answer for it. It's kind of 'sponsored underwriting'.
Or do what I did... after you max out your credit cards, use money you saved up to pay for taxes to fund a business, run out of money, and end up homeless with $200,000 in debt (including student loans).
You have also just discovered why there are early stage investors. If you create an app has some potential to make billions that attracts millions of active users in a month, but doesn't make a dime now, no bank will lend you money the 16 million USD you need to keep building that. But if you convince a tier 1 VC (Accel, Sequoia, A16Z, etc.), to invest 12 million, an early stage bank might lend you 4 million USD, using your big pile of VC money to secure the loan. Just remember that raising money the first time is super hard. You can easily run out of real money by spending too much time trying to raise money (which will suck extra bad if you are living off the money you set aside to pay taxes).
Or you can just say "fuck it", go for it, and hope for the best. When I was homeless, I kept hustling, managed to get my hands on a check for $5000, turned that into a business with 15 employees and sound it a couple years later, and sold it for $200,000. You can read a very polished version of that story in my LinkedIn profile (link in my HN profile).