How to Overcome Obstacles When Getting Loans for Businesses

Business loans are commonly used to acquire inventory, buy equipment, rent operating space, recruit personnel, and pay for various other expenditures when starting a business or growing an existing one. On the other hand, new businesses may find it difficult to get business loans. It might be depressing when a lender rejects your application for a small business loan, but you're not alone. A lender can reject your business loan application for various reasons, but you can identify these warning signs ahead of time. Once you understand why lenders reject small business loan applications, you can plan to address any concerns.

Age of the Business

Finding the necessary finances is one of a new business' most difficult challenges. However, start-up businesses face the same issue regarding traditional finance: they're too young! Many traditional lenders, such as banks and the Small Business Administration, require that you have been in business for at least two years before applying for loans for businesses. This makes sense since it helps you demonstrate that you've been able to manage your firm successfully and sustainably. This is why alternative fundraising options, like crowdsourcing, could be a suitable fit for a start-up. Crowdfunding is ideal for small businesses just getting started since it allows you to fund your organization's development at any level as long as you have a sound business strategy and the know-how to articulate it.

Limited Cash Flow

When it comes to assessing the health of your business, cash flow — the amount of cash you have on hand to repay a loan – is generally the first thing lenders look at. Most lenders can't afford to overlook insufficient cash flow. As a result, it's the first item you should consider when determining whether you can afford a loan. Calculating your cash flow at least once a quarter is one good preventative strategy. This enables you to optimize your cash flow before addressing potential lenders if you take that step. Divide your net operating income by your total yearly debt to obtain your debt service coverage ratio, which will tell you how much you can afford to borrow. If your cash flow is equivalent to your monthly loan payments, you'll have a ratio of one. Though a ratio of one is okay, lending companies prefer a ratio of 1.35. It shows you have a financial cushion.

Lack of a Business Plan

Lenders want to know that you have a solid business plan. They are hesitant to provide loans for businesses that do not have an identified strategy. In finance, having a strategy and adhering to it is far more appealing than being spontaneous. Applying for a loan with no business or a shoddy proposal is not a good idea. Although it's not unusual for extremely small firms to operate without a formal business plan – or even any plan at all – you'll still need to invest the time and effort necessary to create a complete business plan before approaching a lender. A typical business plan contains a summary of your business, market, goods, and financials. If you're unsure if your plan is strong enough to persuade a lender, try hiring a business plan professional to analyze it and provide input.

Missing Application Documents

Applying for loans for businesses can be time-consuming. When you factor in the mountains of paperwork that certain lenders want, it's easy to become frustrated. Banks and lenders, on the other hand, require these facts before giving out loans. Each document aids the lender in determining your risk level and if lending money to your business is a good investment. Setting aside time to go over your loan application page by page and double-check the facts after you're done is crucial. You must locate and produce all relevant tax returns, bank statements, company licenses, and other papers requested by the lender, regardless of how long it takes. You may be able to overcome hurdles that are stopping you from qualifying if you follow through with every request.

Bad Business Credit

When applying for a small company loan, your business credit score and credit record may be one of the most crucial elements a lender considers. According to a survey conducted by the National Small Company Association, 20% of small business owners experienced financing denials because of a poor credit score. Your company credit information shows lenders how you've handled credit commitments in the past and if you'll be able to pay your payments on time. It's a good idea to look through your company's credit reports when filing for a small business loan to ensure they're in good shape. If you don't like what you find, you can create plans to raise company credit in the future.

Bad Personal Credit

Small businesses are frequently, inextricably linked to their proprietors. As a result, it's logical that a lender would want to look at how you manage personal credit to obtain a sense of how your company would manage its credit commitments. A poor personal credit score might be a deal-breaker for some company loan applications. For example, it's not unusual to find business owners with bad mortgage debt. Mortgage debt in the United States was $16.01 trillion in 2021, according to Statista. Such owners might be able to get a negative credit business loan but expect to pay higher interest rates and fees. In the long term, the right option is to focus on raising their credit score.

Limited Customer Concentration

Banks are generally wary of offering loans for businesses that declare a large percentage of their sales coming from a small number of clients. Lenders like to see a business' clients as diverse as possible, rather than the same ones every time. Traditional banks may have a problem with a small bar or restaurant that relies mostly on its "regulars" for continuous income. To avoid this, ensure you widen your customer reach so that most of your earnings do not come from a select few customers.

Debt-to-Income Ratio

Banks are hesitant to lend to firms that already owe money to other lenders. They often will not consider lending to a company that has previously taken out a loan. Because many SMB owners seek financing from various sources, particularly during the start of the business, this can be a huge disadvantage when asking for a standard bank loan or cash advance. Hence, businesses must keep an eye on their debt-to-income ratio to ensure that it doesn't pose an obstacle to obtaining loans for businesses in the future.

No Collateral

Because loan applications typically contain a request for valid collateral to complete the deal and get cash, a lack of suitable collateral prevents SMBs from acquiring finance. This isn't a problem for huge corporations with real estate or other high-value assets, but for small firms, this can be an insurmountable obstacle.

To surmount this obstacle and obtain loans for businesses, firms can seek out alternative sources of financing such as SBA (7a) loans, equipment financing, line of credit, invoice financing, and merchant cash advance. Some form of security may be necessary with small business funding, but it isn't cash or another tangible item. Invoice finance, for example, allows you to borrow money by leveraging your outstanding invoices. For a merchant cash advance, the loan is secured by the value of future credit card revenues. The equipment you're buying or leasing acts as security for the loan in the case of equipment financing.

Loans for businesses are often difficult to obtain because of the complicated application processes and requirements involved, but by ensuring that your application is detailed and convincing, they can be obtained. Alternatively, businesses could explore other alternative financing options that are less demanding. To learn more about the financing options we offer at Capital Bank, call us today!