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Giving Entrepreneurs Real Credit

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According to the Federal Reserve less than 28% of small businesses are able to get loans because of the tighter restrictions. When you consider that there are 28 million businesses in the US, according to the US Census Bureau, that means roughly 21 million businesses can't obtain traditional loans, so they have to rely on friends, family, factors, angel investors, crowd funding, credit cards, etc. That is a gauntlet that Clint Eastwood wouldn't want to go through.

The problem is the business data and credit scoring infrastructure that has been created and in existence since 1843 was not made for the self-employed, the entrepreneur, or the business owner. It was made for the consumer and applied to the small business owner or entrepreneur and does not give true credit for the value of the actual business itself.

Mostly every small business is run to be Tax Efficient. Meaning, taxes are minimized through expensing losses. Often times, income received by the owners are mitigated by these losses. The result, a business owner can build a business worth a substantial sum from a business valuation perspective, that might show NO or LIMITED income. This occurs for more than a third of all businesses in the United States.

But lenders (Banks; Mortgage companies; Alternative lenders; and other capital providers) lending models are based upon risk models they built from data from the big four credit rating agencies
When these small business owners than go for a loan they are asked two things from their bank or lenders. These two questions are:

1. What is their credit score?
2. What is their current income or salary?

Simple "credit" scoring and current income verification is not enough. Seventy percent of a business owners net worth is tied up in their business, but few banks look at anything beyond the value of the real estate and hard assets. Over the last two decades that view of valuation is out of date.

Today, because of technology and infinite amount of data, business owners can plug in data about their company and match it against similar businesses to find out what their business is worth and leverage that data for loans. Business data companies like Hoovers, banks like MetroBank and credit bureaus like Equifax are all using and offering online databases to measure a business's value not just for loans, but for financial planning, buying and selling businesses.

If you are a business owner trying to get a loan take advantage of these new tools to enhance your chances of obtaining the capital you need to take advantage of this growing economy.