A small business loan refers to the amount an entrepreneur can borrow from a financial institution to start, expand, or run the operations of a small business. However, the challenges in getting approval for such loans include poor credit, cash flow limitations, insufficiency of investment, and significant debts obligations.
Business owners can identify these issues while availing small business loans for funding and successfully finance their operations. Typically, entrepreneurs can overcome these by creating an adequate business plan, securing capital, maximising income, making moderate investments, and minimising debts.
This post will discuss critical problems entrepreneurs face to secure a small business loan. Let’s take a look.
5 Common Hurdles When Applying for a Small Business Loan
1. Bad Business Credit:
A borrower’s credit score reflects their financial well-being and history. Therefore, lenders always check the credit report before lending any loan. As per a recent survey by the National Small Business Association, about 20% of small business owners could not get loans to finance their business due to low credit scores.
The business credit details apprise the lender about the borrower’s past credit obligations and the debts they have to play in the future. All borrowers must always review their business credit reports before availing of business credit loans.
2. Cash Flow Limitations:
Inconsistent cash flows are red flags when you have business loan requirements. With limited cash flow, a borrower’s business usually has trouble keeping up with the repayments of the new debt. When they experience cash flow struggles, one area to look into is invoicing.
It is essential to ensure that a proper system of invoicing is maintained. Implementation of late payment fees for slow payers or regular follow-up procedures for invoices that exceed the respective due dates is the technique for managing cash flows.
3. Missing Documents or Information:
Business loan applications are critical, requiring applicants to fill in the information correctly and upload the proper documents. Each information and document is utilised to assess the borrower’s risk level and determine whether loaning money is a sound investment. The borrower must set aside time to go through the loan application line by line and double-check the details.
4. Insufficient Time in Business:
The insufficient time devoted to business can be disadvantageous while availing of business loans. As a new business, lenders do not issue loans unless there has been a business of duration of six months to two years.
However, it’s easier for an established business to secure financing than a startup. The borrower must always apply for small business loans based on the company’s age in the industry.
5. Bad Personal Credit
Small business loans closely relate to the borrower. Therefore, the lender reviews how the owner manages personal credit to understand how the business might handle its credit obligations.
For instance, the owner’s low personal credit score might result in rejections of the business loan application. However, it is subject to the terms and conditions. So, it is crucial to get in touch with the customer representatives of a credible lender and understand how your personal credit influences the application for a small business loan.
Conclusion
There are other alternatives to access capital other than small business loans. These include business credit cards and business grants.
Today, business grants are also attractive funding sources available to fuel specific plans. To secure funds under such schemes, the business owners need to compete with other eligible applicants for the funding. In contrast, business credit cards can be availed, but these incur higher interest rates.
If you believe that your application for a small business loan may get rejected, it is vital to get in touch with a lender and understand the requirements. Based on the acquired information, you can use it to improve your chance of getting a loan or look for other alternatives, including loans with collateral.