The Evolution of Business Loan Underwriting

For most business loans, the sheer amount of paperwork that a business has to provide a lender is mind-boggling. It looks something like this:

  • 2-3 years of personal tax returns with full schedules
  • 2-3 years of business tax returns with full schedules
  • A personal financial statement
  • Year-to-date profit & loss, balance sheet, and cash-flow statements
  • Accounts Receivable aging report
  • A debt schedule showing all of the business’s outstanding loans and their payments
  • Personal credit was pulled
  • Business credit was pulled
  • The company’s bylaws and operating agreement
  • The company’s business license, depending on the state
  • A purchase agreement, if the loan is going to be used to buy a fixed asset such as real estate, equipment, etc.
  • A survey and architectural designs, if a construction loan
  • An environmental report, for businesses such as gas stations and others

That’s a long list. It is the norm for most lenders. And there could be more documentation the lender asks for. For example, if the request is for a Small Business Administration loan (SBA) there are SBA specific documents you have to complete such as a 4506t, which allows the SBA to pull your tax returns. They do that to ensure you haven’t fudged your returns.

If you haven’t borrowed money for a business before just think about the process of getting a mortgage to buy a house. Then you will begin to understand just how cumbersome the typical business loan process can be.

This process is still in tact even in today’s technologically advanced business environment. For the most part.

There are alternative lending companies that provide lenders additional data points to help them make better, and safer, loan approval decisions. However, alternative lending data points are not ubiquitous across the business loan landscape.

Sure, for small dollar loans there are lenders who don’t ask for all of that documentation. Some have learned to approve small dollar loans with a simple credit pull. Others, such as merchant cash lenders, look at the business’s daily deposits to determine how much money they will lend to the company. Merchant cash loans are often some of the most expensive business loans available.

Let me remind you what lenders are really looking for when they are deciding to approve a loan application or not.

They want at least two sources of repayment. The first is cashflow, otherwise known as positive revenue, and the second is collateral. Historically those sources of repayment was been distinct from one another.

And after all that, banks are notoriously conservative on how much they lend, compared to Venture Capital that takes into consideration a company’s future valuation potential.

But, what if a lender considered the money the business makes, its revenue, as both of the sources of repayment. Why hasn’t revenue been considered as both cashflow and collateral? Especially revenue that comes in consistently and can be easily estimated.

That is exactly what new types of lenders are doing. They are allowing borrowers with recurring revenue streams, often in the form of monthly subscriptions, to turn their revenue into an asset that can be used to secure loans.

Why would they do that? Because the types of companies that these loans work best for are often growing at such a pace that the need for growth capital outpaces the revenue they are generating.

That is where companies such as Revtap come in handy.

We help revenue-producing companies obtain growth capital that is far less expensive than other forms of funding, such as revenue-based financing, venture capital or private equity. Often times, our capital is a multiple less expensive than investor money or other recurring revenue-based lenders such as Pipe and Clearco.  Not only that, but with Revtap companies get Venture Capital Model type valuation based on their existing revenues; allowing early-stage, high growth companies to access non-dilutive capital unlike anything else out there.

Click here to schedule time with our founders and learn if your company is a fit for tapping into your revenue (e.g. Revtap, get it now?) as a funding mechanism.

 

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