One of the most misunderstood aspects of business lending, including both banks and equipment finance companies, is the perception of risk. Contrary to popular belief, lenders do not favor high risk. So, let’s debunk a common myth around this topic.
Business Plans Are Not a Silver Bullet
There’s a myth that lenders will lend businesses money based solely on a well-crafted business plan. The assumption is that if you’re in the early stages of a business, a solid business plan will impress a lender. Unfortunately, this isn’t the case.
Your lender, whether it’s a bank, a credit union, or an equipment leasing company, probably won’t read your business plan in great detail. Why? Because when it comes to business loans and equipment financing, lenders are more interested in what you’ve done, not what you plan to do.
Where Did This Myth Originate?
This myth likely stems from inspiring tales like Steve Jobs starting Apple in his garage, Silicon Valley legends, and even the popular TV show “Shark Tank”. These stories create an impression that if your idea is good enough, financial institutions will readily fund your venture. However, this isn’t entirely accurate.
Investors on “Shark Tank” are typically “Angel Investors” — wealthy individuals looking to invest in promising ideas in exchange for equity. They operate on a different risk appetite compared to traditional lenders like banks.
The Key Factor: Time in Business
From our experience at Fletch, there’s one key factor that matters to almost all commercial lenders – “Time in Business”. Why is this factor so crucial? If there’s one consistent indicator of success or failure over the term of a loan, it’s the previous time in business. Once your business crosses that magic 3-5 year threshold, your chances of success increase exponentially. This fact carries significant weight with any lender.
Of course, other factors are also considered, including financials and the credit records of the company principals. But “time in business” is often the #1 factor in most cases. So keep this in mind when seeking business credit.
If you’re interested in learning more about business lending or our services, get in touch with us today.