Business Loans Difficulties
A recent survey by the Federal Reserve Bank (Cleveland) showed that 80 percent of small business applicants are turned down for a business loan.
But what this report also highlighted is that where small business owners go to apply for a loan matters a great deal in whether an approval is forthcoming. In this article, learn about the major challenges you will need to overcome to find small business financing and how to overcome them to find the funding you need.
Difficulty 1 Poor Preparation.
When you get ready to apply for a loan, it is easy to assume that all you need to do to prepare is to fill out the provided application form. But the application is just the bare minimum required to get your foot in the door.
You will still need to compete against all of the other loan applicants for available funds. Since you don’t know who your competition is or how loan-worthy they will be, you simply need to put your best foot forward from the start. If you do the bare minimum, you have the lowest possible likelihood of getting approved for funding.
How to overcome this difficulty: Put together a comprehensive business plan detailing where the requested loan funds fit in and how you will use them to profit and pay your loan back on time with interest. Also put together a packet about your company, including legal incorporation documents, tax statements, etc., that a comercial business lender will find convincing. As a side bonus, this type of complete preparation will help you with any creditor you approach, not just with large traditional banks.
Difficulty 2: Lack of Collateral.
The most common type of loan product a small business is eligible for is called a secured loan in small business lending. This type of loan requires you to put up some collateral as security against the chance you may not be able to repay the funds.
As a small business owner, however, it is much less likely you will have appropriate business collateral (in the form of tangible property) to obtain easy commercial loans. This means you either have to use personal property or face rejection.
How to overcome this difficulty: Consider peer-to-peer lending instead, which rarely requests collateral and has a much broader network of lenders to draw from in approving your loan.
Difficulty 3: Loan Request Too Low.
According to Harvard Business School, the most common loan request that small businesses make totals less than $100,000 per application.
To you, requesting a $50,000 or $100,000 loan may seem like reaching for the stars. But to a big brick-and-mortar banking institution, this is like asking if you can borrow a quarter. It just isn’t profitable enough – in terms of the overhead it costs to process your loan request – to approve these types of small business lending requests. The bank stands to make a great deal more by saving up its loan funds to grant much larger loan amounts to established businesses.
How to overcome this difficulty: Get creative in where you seek out easy commercial loans. Microlenders, peer-to-peer lending, credit unions, lines of credit and even the Small Business Administration (SBA) can be worthy alternatives when a traditional bank comercial business department turns you down.
Difficulty 4: Nervous Bankers.
In 2008, the nation went through a major financial crisis. Since the crisis was precipitated by incredibly lax lending tactics, the opposite now holds true across the lending industry. Ever since that time, regulatory agencies have amped up their scrutiny of lenders and debtors alike, imposing harsher penalties on underwriters who do not do their due diligence when screening loan applicants.
The Small Business Administration (SBA) highlights that small businesses have been hardest hit by these heightened security measures in business lending. Specifically, loans to small business applicants have declined by 20 to 31 percent.
How to overcome this difficulty: Seek out banks that adhere to higher capital standards (more liquid asset reserves in place to cover potential losses or loan defaults) for a higher likelihood of loan approval. Also avoid institutions receiving TARP (Troubled Assets Relief Program), as the study showed these institutions are less likely to grant small business loans.
Difficulty 5: No Credit/Poor Credit.
One of the most common reasons small business owners struggle to receive approval for business loans is a simple lack of credit. In some cases, what little miami business loan bad credit credit history there is doesn’t look rosy to the prospective lender, but in most cases, there simply isn’t enough of it to paint much of a picture at all of the applicant’s creditworthiness.
How to overcome this difficulty: The only real remedy here is to build up your credit history while cleaning up any negative issues associated with your business credit. This can mean finding creative alternatives for funding in the meantime. But if you do a good job with this, by the time your credit looks enticing to a big bank, you may no longer need their help!
Difficulty 6: Insufficient Cash Flow.
Finally, another very common reason small businesses get turned down for funding is a lack of cash flow. In fact, according to Entrepreneur, 82 percent of startups fail for this very reason.
This is why having a comprehensive, written business plan is such an essential part of the application process for small business loans. But even with a business plan in place, it is hard for any small business to compete head-to-head cash flow-wise with a big company.
How to overcome this difficulty: Balancing your receivables and payables to maximize cash flow, spending moderately during the startup days and using tools like bartering to acquire necessary services and products can all help improve cash flow. Ultimately, however, you may be better served by seeking out smaller, more flexible funding entities.