Firm business

Five Obstacles to Obtaining a Small Business Loan

It might be disappointing when a lender declines your request for a small business loan. Nonetheless, if you find yourself in this scenario, you are far from alone funds deposited same day.

The United States has about 32 million small companies. According to Federal Reserve statistics, 63 percent of those businesses did not seek funding in 2020 because of fear that their application would be denied. Numerous enterprises who applied for grants (after March of the same year) were either refused (30%) or approved for just a part of the sums asked (26 percent ).

A lender may decline your company loan application, but you may avoid these red lender flags by learning about them in advance. Once you understand why lenders reject small business loan applications, you can plan to address any potential concerns.

Here are five potential roadblocks to obtaining a small company loan.

1. Insufficient Business Credit

When you apply for a small business loan, one of the most critical items a lender will evaluate is your company credit score and credit report. According to a poll conducted by the National Small Company Association, 20% of small business owners who were denied funding did so owing to a poor credit score.

Your business’s credit information demonstrates to lenders how you’ve handled credit obligations in the past and if you’re likely to pay bills on time. Before applying for a small company loan, it’s prudent to verify your business credit reports to ensure they’re in the best possible shape. If you are dissatisfied with the results, you might develop strategies to build company credit in the future.

2. Poor credit history

Small enterprises are sometimes inextricably linked to their proprietors. As such, it’s logical that a lender would want to check your personal credit history to obtain a sense of how your company would manage its financial commitments. According to a Goldman Sachs poll, 70% of small company owners stated their credit score was considered when applying for business finance.

A poor personal credit score may be fatal for some types of company loan applications. You may be eligible for a business loan with terrible credit, but you can expect to pay higher interest rates and costs. Your best course of action is to strive for future credit improvement in the long term.

3. Inadequate Business Time

The length of time your firm has been in operation might also affect your company’s ability to acquire a business loan. As a newer firm, you may face two disadvantages.

  • You may have lacked the necessary time to create favorable company credit.
  • Specific lenders will not provide loans to businesses that have not been in operation for at least six months to two years.

In general, funding an established firm is simpler than financing a startup. However, if you need finance for a young business, you have some possibilities.

Numerous small company loans are available. Simply be mindful of the loan requirements—particularly those about time in operation. You want to avoid asking for small business loans for which you are disqualified due to your firm’s age.

4. Cash Flow Constraints

An insufficient or uneven cash flow might be a red sign when applying for a small company loan. Your firm may struggle to keep up with monthly loan payments without adequate cash flow.

If you’re having difficulty managing your cash flow, your invoicing procedure is one area you may want to examine. As soon as items or services are delivered to your clients, ensure that you have a mechanism to send out bills immediately. Additionally, you may want to consider charging late penalties to delayed payers or establishing more regular follow-up processes for accounts beyond their due dates.

5. Documents or Information That Are Missing

Applying for business financing may be time-consuming. When you factor in the pile of paperwork required by specific lenders, you may experience significant irritation.

On the other hand, banks and lenders need these facts for a purpose. Each piece of information and document assists the lender in determining your risk profile and if lending money to your business is a prudent investment. It is vital to allow time to go through your loan application line by line and then double-check the facts.

Regardless of how long it takes, you must locate and produce each tax return, bank statement, company license, and other papers requested by the lender. If you make a concerted attempt to fulfill each request, you may be able to overcome difficulties that are stopping you from qualifying.

Alternatives to Business Loans

When securing company funding, many individuals immediately think of business loans. However, if you do not qualify for a business loan, there are other alternatives to get financing for your organization.

Credit Cards for Businesses

If you cannot get a standard business loan, you may be able to obtain additional financing for your organization via the use of a business credit card. However, before you apply for a business credit card, here are a few points to consider:

  • A favorable personal credit score may enable you to qualify for the top business credit card offers.
  • You may be able to earn essential incentives or cashback on company expenditures by using a business credit card.
  • If you have poor credit, you may want to seek a secured business credit card.
  • Credit card interest rates may be high, making them ideal for short-term borrowing that you repay by the following statement due date.
  • A business credit card might be detrimental to your credit if used recklessly.
  • A well-managed company credit card may assist you in establishing favorable credit ratings.

Depending on your specific circumstances, a company credit card may not be the optimal substitute for a small business loan. However, it may be a beneficial weapon in your company credit arsenal, even when used in conjunction with other financing choices.

Grants for Small Businesses

If you’re not put off by the possibility of considerable research and paperwork, you may be able to acquire free money for your company. Small business grants may provide your firm with the capital it needs without requiring a return.

  • Grants available from the federal government, state governments, and other organizations may be found online. Here are a few examples.
  • Grants.gov. A helpful site if you’re interested in federal government grant possibilities.

EDA.gov. A searchable database of state and regional grants and government contracts administered by the United States Economic Development Administration.

Grants are enticing sources of money, but obtaining them may be challenging. To be eligible, you must identify a suitable match for your organization. Then, you must bid on all other qualified candidates to receive money. If successful, grants may give an infusion of cash to your firm without having to return the money.

Investors

Investors may be attracted to promising new enterprises, particularly those with the potential to disrupt an existing sector. These investors (venture capitalists, angel investors, and others) agree to finance a firm in return for its stake.

With investors, your firm is not required to return the cash in the same way with a loan or other kind of debt. However, the investor may want a stake in the firm or get royalties in exchange for their investment. Before proceeding with this finance strategy, ensure that you are okay with the prospect of selling a share of your firm and accepting advice from your new partners.