…and what you can do about it.
Of small businesses that applied for financing in the first half of 2014, only half received any amount, according to a survey by the Federal Reserve Banks of New York, Atlanta, Cleveland and Philadelphia.
Here are some of the top reasons why small business owners are turned down for business loans:
- Bad credit or no credit: Banks generally look at both personal and business credit scores to make lending decisions and set interest rates. Generally, a credit score can be low for several reasons, including bankruptcy, and late or missed payments to lenders, credit card issuers and vendors. Some businesses are simply too new to have established any credit history. To raise their personal and business credit scores, business owners should make payments on time, spend well under their credit limit and keep credit accounts open.
- Lack of collateral: Banks often require collateral – physical property that can guarantee a loan if it’s not repaid – before they agree to lend. However, new businesses may not have equipment or real estate to offer as collateral, or they may not be willing to use their personal assets (think: homes and cars) as collateral.
- Weak cash flow: Banks want to see that businesses have enough money to make monthly loan payments in addition to covering rent, payroll, inventory and other costs. However, many small businesses struggle to keep enough cash in the bank even if they’re profitable, often because they have to pay third-party suppliers upfront before they get paid for their product or service. If your business has too tight of a margin, work toward lowering expenses or finding ways to grow revenue before applying for a loan.
- Lack of preparation: Some businesses get turned down for small business loans because the owners aren’t prepared. Before applying for a bank loan, businesses should have a written business plan, financial statements or projections, personal and business credit reports, tax returns and bank statements, according to the United States Small Business Administration website. They should also have copies of relevant legal documents including articles of incorporation, contracts, leases, and any licenses and permits needed to operate.
- Small, risky loans: Most small businesses seek loans of less than $100,000, according to a 2014 Harvard Business School working paper by Karen Mills, former SBA administrator. However, banks want to underwrite larger loans because it costs a bank about the same amount to process a $50,000 loan as it does a $1 million loan. Small business loans are also inherently riskier than large business loans or even consumer loans. CDFIs, like Pathway Lending, have emerged to offer the small-dollar loans to these markets that traditional banks are less willing to underwrite.
Don’t let these barriers keep you from successfully growing your business. As a nonprofit lender, Pathway Lending offers flexible loans and advisory services to help you find small business success.
Contact us today to start the relationship and get your business moving forward.