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Corporate Commentary

How Your Physical Location Can Affect The Business Loan Process

Business Meeting at Workplace

Getting a traditional loan can be difficult, and a lot will depend on what kind of loan you are looking for as well as the particular circumstances of your business. While options have proliferated in recent years, most loans are processed by banks and large institutions. Whether or not you get one of these loans (with the associated security and low fees) can depend, to a large extent, on the physical location of your business. If this avenue remains shut, business loans for bad credit are also available, with higher interest rates and stricter terms and conditions.

Getting a Loan in the USA

The typical and most sought after loan in the USA is the SBA(7)(a). This loan is 85% guaranteed by the US government (through the Small Business Association – SBA) in an attempt to get institutions to lend finances to small businesses. As such, it tends to have very favorable terms and conditions. On the other hand, it can be very difficult to acquire with a very lengthy approval process that requires onerous amounts of documentation, as well as a good credit rating. In the USA, the Federal Reserve regulates the banking industry (i.e loans) which also extends to the mortgage industry.

According to statistics from the Small Business Association, typical small business loans have about a 20% chance of approval. This is the same across most general classifications of business types, though there are outliers with higher or lower chances of approval, which is mainly linked to the default rate in that particular sector. SBA loans have a long application process which can be quite rigorous, ruling this option out for many small businesses.

Banks in the USA typically require a credit score of at least 680 in order to qualify for a standard loan. Many banks maintain an eligibility threshold of 1.25 times expenses. This can prove difficult to satisfy for many small business owners.

Getting a Loan in Europe

In Europe, there is no real equivalent program to the SBA in the USA. While there are some initatives, they are generally on a smaller scale with far fewer applicants. Typical programs are done on a national level from countries within the EU.

Small businesses are classified as SME’s (Small to Medium sized enterprises) within Europe. Small businesses in the US are those with under 500 employees, while SME’s are those with less than 250 employees. The European Commission has put in place the Small Business Act for Europe (SBA, confusingly, like its US counterpart). This governs the policy on small European businesses.

The situation of SME’s in the EU in terms of access to finance is improving. According to a European Central Bank report, SME’s are finding it easier to find funding. This is particularly notable in Ireland, Spain, and Portugal which have experienced credit tightening post 2008-2012.  However, SME’s still have a difficult time finding any kind of funding in Greece. Even now, Greece is still experiencing a net deterioration in bank loans compared to nearly all other EU areas. Large firms continue to have a much better loan success rate, at 80%, in comparison to SME’s.

As per EU sources, the success rate of small businesses is 80% in the first year and 50% by the end of year five. These are the same statistics supplied by the US SBA, with a 20% failure rate in the first year and a 50% failure rate in year 5.

Getting a Loan in Australia

According to the Reserve bank of Australia, small businesses are still finding it difficult to gain access to finance. Moreover, the percentage of businesses who previously found it easy to acquire finance has declined. This is despite the fact that the interest rates on small business loans remain at all time lows. Smaller businesses tend to face far higher interest rates, a trend which is also easily observed in Europe.

Banks in Australia seem to be more reluctant to grant loans to startups. They are also far more likely to demand real estate as collateral before generating the loan. Small businesses in Australia will have a very difficult time finding a loan above $100,000 without providing collateral. Unfortunately, many medium-sized enterprises are reporting that it is difficult to find additional funding once all collateral has been pledged to a loan provider.

Like other jurisdictions, the loan process in Australia is lengthy and drawn out. To compound the problem, large businesses have a tendency to delay payments on smaller businesses, a matter which was addressed in a 2017 report by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO). The banks have responded by stating that the current regulatory capital requirements encourage them to seek residential property as an additional form of collateral for small business loans.

Alternative Online Loans and Lending Solutions

In all instances, no matter where you happen to be located in the world, alternative lenders have a higher approval rating compared to banks and institutions. While big banks approve just 20% of applications, alternative lending platforms approve over 60% of applications. This is why alternative lenders can be an extremely lucrative option for small businesses.

Online lenders such as Ondeck, Kabbage, and Fundbox can generate an unsecured business loan within a day, and an application can be processed within minutes in many instances. This kind of efficiency cannot be reached with traditional loan models, which is why companies are going online for small business loans. Different kinds of loans such as invoice factoring and trade finance loans are also possible with these kinds of online platforms.

Additionally, platforms such as Lending Club offer peer to peer lending for personal loans up to $40,000, which is another option. The loan model is increasing in its sophistication and flexibility by the day, resulting in more options for business owners. While these are all US-based lending platforms, they have their equivalents across the globe. After all, small businesses need finance, and economies are powered by small business enterprises.

Micro-lending platforms are also a potential solution and they can bridge cash flow shortages. However, the APR can be high with these lenders and they may not be a long-term viable option. They also require lots of documentation to ensure that loan repayments can be made and the application process is not as quick or smooth compared to online lending platforms.

It is also possible to raise capital from local investors through crowdsourcing options which have become quite popular in recent years. Capital of some form is nearly always available from a lender- however, the lending criteria can prove to be quite onerous and not worth the hassle if rates are too high.

Primary Loan Qualifying Criteria

It should be understood that while physical location affects the business loan process, there are many more criteria which go into the loan application process. The business itself will obviously be evaluated on its own merits, such as business credit rating, balance sheet, and collateral. The loan process is often very complex and sophisticated. With many online platforms, it is an algorithm that calculates all of the data and generates the figures, signed off by a specialist once agreed by the applicant.

Industry type can also have a huge effect on the loan application. Some industries (such as breweries and oil and gas support services) tend to have a default ratio very near zero. As such, they have a huge loan success ratio and are rarely refused. In this instance, the balance sheet and collateral can often take a back seat. But in most other instances, they are the primary means of determining the success of a loan application.

As a general rule of thumb, getting a bank loan for a small business is very difficult without collateral, a good credit rating, and at least a year in business with significant annual turnover. This turnover can range between $50 – $150,000 as a minimum requirement depending on the bank. The loan process can take a long time and be mentally and emotionally draining. This holds true in the US, Europe, and Australia.


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Dr. Amarendra Bhushan Dhiraj
Dr. Amarendra Bhushan Dhiraj is the CEO and editorial director at CEOWORLD magazine, the leading global business magazine written strictly for CEOs, CFOs, top managers, company directors, investors, senior executives, business leaders, and high net worth individuals.
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