Small businesses need steady cash flow to run effectively. Unfortunately, accessing cash is tough since the slightest change in the economy can jeopardize a small business’ cash flow. Small business loans are an attractive option in tough times, but qualifying for them can be tough.
Thanks to regulatory changes in the broader economy, many banks these days have pursued belt-tightening measures. Capital reserve requirements and reducing portfolio risk are huge priorities, both of which leave small business owners with high hurdles to overcome.
However, overcoming these challenges is simpler than you think. Here are 4 hurdles to a successful small business loan application, and how to overcome them.
1. Unprofitable business
The biggest hurdle to qualification is running an unprofitable business. While technology companies that don’t make a dime for decades receive publicity and venture capital funding, small businesses that burn cash tend to get overlooked by banks. Banks are highly risk-averse, and this puts business owners at a disadvantage when applying for a small business loan.
An unprofitable business makes it almost impossible to qualify for a traditional small business loan. If this situation applies to you, the best place to begin is government loan programs and other relief measures. Government programs tend to accept greater degrees of risk, and you might qualify for special relief programs.
For instance, many governments have programs targeting women and owners from minority communities, aimed at boosting entrepreneurship. If this doesn’t apply to you, then seeking merchant cash advances, short-term loans, and business lines of credit are viable options.
You can even reach out to factoring companies and borrow against your receivables or assets. Note that the interest rates you’ll pay vary significantly from one option to the next. Make sure you conduct thorough research into your options and understand all the terms involved.
2. Poor business credit
The world of personal finance revolves around the almighty credit score. Business financing is no different. Banks will take your business’ credit score into account before making a financing decision. Often, a profitable business can be disqualified due to a less-than-ideal credit score.
Profitable businesses that were financed by a personal loan in the beginning and businesses that are recovering from bankruptcy fall foul of this requirement frequently. There is no magic solution to this problem. The best you can do is begin establishing a predictable and steady record of payments.
Counterintuitively, taking on debt at this time will help you. Lenders are more concerned with your ability to make payments on time, instead of evaluating the intricacies of your debt to asset ratios. Debt allows you to establish a monthly payment pipeline that demonstrates financial stability in the bank’s eyes.
Businesses recovering from bankruptcy within the past 3 years will be better served seeking alternative lines of credit. Past the 3 year mark, small business loan financing is a good option.
3. Lien issues
Banks are extremely concerned about liens and their implications on the loan they’ll prospectively provide you. When a bank lends you money, their primary objective is recovering their cash back or securing something of value. In most cases, small business loans are secured against business assets.
If those assets are secured against another loan, the bank will assume a junior position in the debt repayment scheme. Obviously, this isn’t a position any creditor wants to be in. If your business has an outstanding tax lien, matters are even worse for the bank. While they can negotiate their position with other creditors, there’s no negotiating with the government.
If you’re in this position, it’s best to be upfront with the bank and inquire about your options. Typically, tax lines must be cleared before you can hope to secure any form of financing. Liens from private lenders can be consolidated into a single loan, and there’s room for negotiation. Try to consolidate your debt with a single lender, and you’ll increase your chances of approval.
4. Your industry is risky
Some businesses will never qualify for traditional small business loans due to the nature of their sector’s economics. For instance, restaurants face a tough time securing loans since the average lifecycle of a restaurant is low. Lenders will almost certainly have to initiate a collateral recovery process at some time, and this costs money.
Other businesses operating in sectors like gambling will have a tough time convincing a traditional lender to finance them. The best option these businesses have is to approach lenders who specialize in their sectors. These lenders will require different debt utilization thresholds, so make sure you inquire what their requirements are.
These days, crowdsourcing funds is a popular option. Many online lenders can help with the process, so make sure you check those options out as well.
Overcoming hurdles
Small business owners are accustomed to overcoming challenges when running their businesses. Securing a small business loan is no different. Follow the tips in this article to position yourself ideally in the lender’s eyes.
