Find the Best Financing Options for Your Small Business.
SMALL BUSINESS LOAN REQUIREMENTS
Small business loans can be hard to get.
Banks continue to tighten their lending standards to comply with government regulations and have lowered their credit limits for business owners, in many cases, shutting down small business loans altogether. According to EasyKnock as recently as February 2019, “Big banks still reject almost 80% of small business loan applications.”
But why? Lenders look at a range of criteria when qualifying clients and may deny small businesses due to the lack of credit history, poor personal credit of the company owner(s), weak cash flow, lack of collateral, or because the lender has allocated their resources to more profitable accounts.
4 REASONS BANKS TURN DOWN APPLICANTS FOR SMALL BUSINESS LOANS
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Poor credit history
There isn’t a set minimum credit score needed for small business loans, but banks prefer a small business owner with higher personal scores (think 700+) as an indication that they are likely to pay back their debt. Because of this, small businesses typically have a hard time getting a bank loan without a reputable credit history or established creditworthiness. This doesn’t necessarily mean that they have bad credit due to previous late payments, but simply because they haven’t been in business long enough.
Furthermore, banks put more emphasis on credit than character. So, regardless of the overall strength of the business and opportunities presented, companies may need to find an alternative lending source where credit history is not as imperative.
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Weak cash flow
Banks consider healthy and well-established cash flow as one of the key indicators in the ability to pay off existing debts. Business owners may have difficulty getting a loan from a bank if the company’s operating costs outweigh the money that is entering the business. Oftentimes small businesses experience this problem for a number reasons: seasonal business fluctuations, slow paying customers or high debtor (customer) concentrations. Most of these are inevitable for smaller companies and hinder them from getting the funding they need to grow, let alone survive.
READ THIS POST ON HOW TO IMPROVE CASH FLOW. IF GETTING A BUSINESS LOAN IS NOT AN OPTION, CONSIDER ALTERNATIVE FINANCING, WHICH WE DISCUSS BELOW. -
Lack of collateral
Lenders prefer to work with companies that are able to pledge collateral (assets such as equipment or property) to secure their loan. The lack of collateral can significantly affect their ability to qualify for a loan. As a result, they often ask for the business owner to pledge their home or other assets as additional collateral! -
Resources allocated to more profitable accounts
Banks are more likely to extend their efforts and capital to companies that generate more revenue for their institution. Not only do small businesses seem like riskier clients, they are simply not as profitable as larger businesses.
THE GOOD, THE BAD & THE UGLY ALTERNATIVES TO SMALL BUSINESS LOANS
THE GOOD: Accounts Receivable Financing
When getting a loan from the bank is not an option, small businesses should consider working with alternative lenders, such as those that offer accounts receivable financing (also known as invoice financing or factoring). Invoice financing companies typically put less emphasis on credit history and collateral since they are able to extend credit based off work that has already been completed and invoiced.
However, these financing companies may still turn away small businesses with a high debtor (your customer) concentration because the lack of diversification imposes a risk. Commercial Funding, on the other hand, can help companies with high or even 100% debtor concentration as long as their customer is credit worthy.
Furthermore, small businesses can benefit from financing their invoices versus getting a loan.
Reasons to consider invoice financing over a small business loan:
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There is a possibility of outgrowing a loan.
As businesses grow, they will likely need additional capital to keep up with that growth. Traditional lenders, however, might not be willing to increase capital as freely as a small business requires. It is a lot easier for a company to increase capital through factoring, as long as their customers are creditworthy.
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Loans increase debt.
Unlike a traditional loan, financing accounts receivables does not require a business to “borrow” money. At CFI, we actually purchase your invoices, thus, providing you the liquidity you need to run your business up front at the time of purchase. This could be a great debt-free option for growing businesses, especially if those businesses are borrowing money for other business necessities like equipment.
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Businesses that experience seasonality may struggle to keep up with monthly payments.
Factoring can be an alternative financing solution because it allows companies to submit invoices as they are generated.
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Loan approvals can be slow.
One major perk about factoring is the speed of funding. If you have invoices for credit worthy customers (debtors), factoring companies may be able to extend credit in as little as one day. Additionally, once you’ve established a relationship with your factoring company, approvals for additional credit for new or existing debtors can be completed within a few hours or sometimes instantaneous.
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THE BAD: Peer-to-Peer Lending and Crowdfunding
Peer-to-peer lending and crowdfunding are not practical options, and they aren’t always the most reliable. For one, you have to market yourself in order to get investors. If an investor decides to take stake in your business, they will also want some sort of return in its success. Secondly, money coming in through these sources is not constant and force companies to eventually seek other funding options.
THE UGLY: Merchant Cash Advance
Merchant Cash Advances should be the ABSOLUTE LAST OPTION for small business owners, and business owners should be fully aware of how MCAs work before getting into a contract. MCA loans come with high interest rates that are often impossible to calculate. They may seem enticing with easy approval and the quick influx of cash, but MCA loans can be a debt trap. Commercial Funding has helped businesses refinance MCA loans, but it is not easy to do. We highly recommend that small business owners consider other financing options before getting a merchant cash advance.
LEARN MORE ABOUT THE DANGERS OF MCA LOANS IN THIS POST.
ALTERNATIVE LENDING FOR SMALL BUSINESSES IS A VIABLE OPTION FOR COMPANIES THAT CANNOT GET A BANK LOAN
Small business owners do not always have to go through a bank to get the money they need to grow their companies. Actually, there are many options for alternative financing that business owners should consider before applying for a loan. As discussed earlier in this post, there are many benefits to financing receivables. If you are a small business owner considering alternative lending opportunities, contact Commercial Funding. We can grow with you!
