Small business loans are the much-needed life jacket for someone about to drown in a financial crisis. The financing can save the business from going under.
Studies show money flow issues as one of the reasons many small businesses fail. A 2020 research shows that poor cash flow understanding and management contribute to 82% of small business failures.
But, an entrepreneur does not only apply for small business loans in dire situations. Sometimes, it could be for business growth or even to buy equipment.
The good news for entrepreneurs is that small business financing is available. Indeed, online lending platforms have eased access to loans. There are no stringent application processes. The qualification criteria are quite lenient. Having a good credit score helps in getting favorable loan terms. Within hours, you can have money in your business account.
That said, applying for small business loans is not always smooth sailing. Some obstacles may impact your ability to get financing. That is what we will explore, as well as give pointers on how to overcome such roadblocks.
A Poor Credit Score
Many people can only hope to achieve a perfect credit score. The most significant advantage is lenders will have no problem giving you financing. With a good credit score, the lenders will even throw in favorable terms, unlike what you will get with a poor credit score.
So, how does a poor credit score happen?
- Missed Debt Repayment: Not keeping up with debt repayment will impact your credit score.
- Prepaid Cards: If you have prepaid cards that report to credit bureaus, it will go on your report. The result is a low credit score that can make it hard to get financing.
- Personal Debts: Entrepreneurs need to know the importance of keeping personal and business finances separate. Your personal debts, for instance, should not reflect on the business account.
- Lack of Business Credit History: Opening a separate credit history for the business is critical. You want to be able to apply for business loans without using your personal credit history.
- Error in Credit Score: A poor credit report does not always show an inability to keep up with debt repayments. An error in your credit report can impact your scoring.
Consider Credit Repair Services
What happens when you find an error in your credit report? The first step is to seek remedial action from the credit reference bureau. The process can be long, tedious, and time-consuming. You can expect a lot of going back and forth as you try to prove that there is a mistake.
As a business owner, you may not have the time. Also, not knowing what to do comes with its frustrations. In such times, consider delegating the task to reputed credit repair services to handle the task for you. They will use their networks and resources to resolve the issues fast.
That’s not all. Credit repair professionals will take on the job of monitoring your credit report. That way, they can identify and correct any mistakes early.
You can access a free credit report from Transunion, Experian, or Equifax. But, if you don’t know what to look for, a glaring error can remain on the credit report. Let the credit repair pros do the work for you.
You Don’t Have a Business Plan
A business plan is critical when applying for small business loans. Remember, lenders are not in the business of doling out money to every entrepreneur. They make strategic decisions based on what you show them.
The business plan should have financial projections and information. You can be sure they will ask how you plan to use the money and how you will pay it back.
Tons of Paperwork and Lengthy Approval Processes
Applying for small business loans can be tedious. The lenders will ask for a lot of documentation to prove your ability to pay. Such include great credit scores, credit reports, tax returns, bank statements, and legal statements. You must provide the correct information, or you may not qualify.
Another challenge is the lengthy approval process. Some lenders will take a long time before they give you feedback. That can have a significant impact on the business, especially if it is an emergency.
As said earlier, online lending platforms provide a convenient, easy way to get financing. Their requirements are usually less stringent, and approval times shorter.
You Are In a High-Risk Business
Your industry can determine your chances of getting small business loans. Lenders refer to some industries as high-risk ventures. In such cases, even a good credit score will not change their perception of your ability to pay. These include:-
- Firearm and alcohol-related businesses due to constant changes in legislation
- Industries that do not bring in constant revenue, such as restaurants
- Businesses in a saturated market like nail salons, gyms, and pizza places
- Easily replaceable sectors, which can become obsolete due to technology.
Other high-risk ventures include accounting, insurance, real estate, oil, and media. Do not despair, though, if you are in any of the industries. Lenders can still give you a small business loan. But prepare for higher interest rates and, in some instances, longer repayment terms.
The Business Is Still New
Lenders will look at your operating history to decide whether to give you a small business loan. That fact places new business owners at a distinct disadvantage.
One issue is that you still do not have a business credit history. But, the lender can use your personal credit history for reference.
We reiterate the importance of keeping a close eye on your credit report. Top-rated credit repair companies can take on a monitoring role. They will ensure that your credit report stays blemish-free.
Some lenders are particular about operating history. They will only give loans to those who have been open for at least 6 months.
But, others have packages that are specific to startups. So take time to shop around for an ideal one. But you need to be careful about applying for too many loans at the same time. You may think of it as ‘trial and error’. But, the lenders may run hard inquiries, which could impact your credit score.
Limited Cash Flow
The lenders look at how much cash you have as a determinant of the business’s health. If it is insufficient, it could be a sign that you will not be able to pay back the loan.
Keep up with cash flow monitoring in the business. Also, look for ways to optimize the money you have so that it works for the company. You must show the lender proof that the business is not in the red.
Ideally, have a buffer. That means that after payments, you have something left over. It doesn’t hurt to consider getting a financial advisor or planner. They can devise a workable plan to ensure you always have enough cash flow within the business.
Final Thoughts
It can take a lot of work to circumvent the business world. And it is not uncommon for small businesses to face financial issues. Small business loans can provide a timely solution when you need it. But, several obstacles could impact your ability to get financing.
We have shared some of the most common reasons and solutions above. Credit repair services can help fix your credit score. A business plan and good cash flow are critical. Understanding them will help when applying for small business loans.
