Despite recent years of economic growth, many small business owners struggle to find sufficient financing to open or expand their business. Banks placed considerable hurdles for loan applicants to overcome and, to many aspiring entrepreneurs, it seems as though the only people who can get money are those who don't need it.
There are three obstacles in particular which can derail a small business loan application from the beginning.
Debt and poor credit are huge red flags for lenders when evaluating a small business loan. Outstanding debt obligations can indicate that the business owner is not proficient at managing money, or the business is struggling with cash flow. Poor credit is often taken as a sign that the borrower either doesn't take their debt obligations seriously, or takes too many risks.
Unfortunately for small businesses, debt and credit evaluations extend beyond the scope of the company and into the personal life of the business owner. A company that pays all of its bills on time can still be rejected for a business loan, if the business owner has a history of poor personal finance.
Small business loan applicants often struggle with providing sufficient documentation in two crucial areas.
The single greatest indicator of the strength of a business is cash flow – is more money coming in than is going out? Established businesses have tax returns, years of sales, and a reasonably realistic projection of future earnings, based on their history. New businesses, on the other hand, lack proof of earnings, or may be unable to demonstrate that a year of good sales was more than an anomaly.
An insufficient business plan is another area where small business loan applicants fail to provide documentation. Too many applicants hastily throw together a description of their business idea, but don't address critical issues the bank will look for in its evaluation. The bank looks at the applicant's market analysis to see how the applicant will address the competition or set the business apart. Lenders want to see a growth plan for the next year, five years, and even ten years. Most importantly, the lender wants to know how the loaned money will be spent and how the loan will be repaid.
The competitive business world can be brutal, and even the best business plans, most innovative products, and market defining ideas can fall flat. In such cases, with the loan money spent, the bank seizes collateral to recoup its losses.
A common mistake that business owners make is attaching a higher value to their potential collateral than the bank is willing to accept. A transportation company may want to use a couple of its trucks as collateral for the loan, but the depreciated value of the vehicles, combined with the continued depreciation over the life of the loan, may be woefully insufficient as collateral.
At that point, it's tempting to consider adding personal assets as additional collateral, but even then, business loan applicants may not have enough resources to secure a loan for the desired amount.
At CapRock Services we've heard thousands of stories from aspiring entrepreneurs and business owners who couldn't get the financing they needed from traditional sources. The lack of financing cost them significant growth opportunities, and sometimes forced their businesses into stagnation or closure.
We strive to provide our borrowers with the resources, alternative funding sources, and support that they need to make their business dreams come true. If you've been denied a loan from the bank for your business, please contact us today. We may be able to help.