8 Components That Save you You From Getting A Small Business Loans
Small business loans are not easy to obtain. Here are eight things that may be preventing you from getting the funds you need.
- Bad credit and bad cash flow can prevent small businesses from obtaining credit.
- Before applying for a business loan, make sure your financial documents are in order and that you understand what lenders need.
- A good business plan makes your business attractive to lenders and gives you a better chance of getting a loan instantly.
Business loans may be necessary to start or expand an existing business. The funds are often used to protect inventory, purchase equipment, rent operating rooms, hire employees, or cover other expenses. However, getting business loans for start-ups can be difficult. Is there really a credit check? Consider these eight hurdles that can prevent you from getting approved for a small business loan.
1. Bad credit
Credit reports are one of the tools lenders use to determine a borrower’s credibility. If your credit report shows a lack of due diligence on your debts, you may be denied a loan.
Paul Steck, COO of Spread Bagelry, has worked with hundreds of small franchise companies, many of which have bad personal loans due to illness, divorce or other extenuating circumstances.
“Sometimes very good people have credit problems for reasons beyond their control, and sadly, that is a real obstacle to entering the small business world,” Steck said.
It is difficult to qualify for a small business loan with a credit score of less than 700.
“The value of 720 seems like a magic number that will dramatically increase and decrease your probability,” said Brian Cairns, founder of ProStrategix Consulting, which offers a variety of services to startups and small businesses. Companies.
If your score is less than 700, Cairns recommends focusing on resolution whenever you can. First, check your personal and business credit scores to make sure they are correct. If you find any errors, correct them before starting the loan application process. You can request a free personal credit report annually from one of the three credit reference agencies at AnnualCreditReport.com or individually from each agency: TransUnion, Equifax, and Experian. Contact Equifax, Experian, and Dun & Bradstreet to verify your creditworthiness.
Before applying for a business loan, you must have good personal creditworthiness and reduce debt.
“The better your personal finances, the more likely you are to be approved for a good loan option,” said Jared Weitz, CEO and founder of United Capital Source, a small to medium-sized lender.
“Most loans require a down payment and are generally dependent on the borrower’s financial history and collateral,” Weitz added. “On that basis, most loans go from zero to 20 percent of the loan advance.”
If your credit is not perfect after following these steps, consider non-traditional financing options where creditworthiness is a lower priority before giving up on the loan.
“Business angels or those interested in sponsoring a company to get some of the potential sales could be a way to start,” said financial attorney Leslie Tayne of Tayne Law Group.
2. Limited cash flow
Cash flow, which is a measure of the amount needed to pay off a loan, is often the first thing lenders look at when evaluating the health of your business. Insufficient cash flow is a mistake that most lenders cannot ignore. Therefore, when deciding on a loan, you must first take into account:
“When you really think about this cash flow equation, it’s like preventative medicine for your business,” said Jay DesMarteau, director of regional specialties for TD Bank. “You can wait until your company gets sick, or you can do several things to prevent it from getting sick.”
One of the precautionary measures recommended by DesMarteau is to calculate cash flow at least quarterly. This step has the potential to optimize your cash flow before contacting potential lenders.
To find out how much you can afford on a loan, divide your operating income by your total annual debt to calculate the debt service coverage ratio. The factor is 1 if the cash flow corresponds to the monthly loan payments. While a factor of 1 is acceptable, lenders prefer a factor of 1.35 indicating that you have created a cushion on your finances.
“If you are unsure of your current financial situation or ability, talk to your financial advisor to get the perspective you need and create an action plan for the missing areas,” said Chad Rixse. Director of Financial Planning and Real Estate Advisor at Forefront Wealth Partners.
3. Lack of a solid business plan
Having a plan and sticking to it is much more tempting than being spontaneous in the financial world. It also gives you a better chance of obtaining a business loan.
“Lenders want to make sure you have a well-designed plan for your business,” Tayne said. “Getting a loan without a business plan or a summer plan is not a good sign.”
The less frequent cases where small businesses are represented is an important factor in determining whether it is an investment that involves development and a commitment to implement a comprehensive business plan.
“If you haven’t documented a plan with financial information and forecasts, your chances of getting the high credit you expect will be reduced,” Weitz said.
A standard business plan is a summary of your company, market, products, and finances. If you are unsure whether your plan is persuasive enough to convince the lender, you should seek the advice of a business plan expert who can review it and provide feedback.
You should also be prepared to explain how you plan to use the money you want to borrow.
“Candidates can better position themselves by being able to identify exactly what they need and why they need it,” said Bernardo Martinez, former director of the Circle of Finance of the United States, a small business lending platform.
“Instead of asking for $ 100,000 in working capital, we are much more confident if a candidate promises $ 33,000 for preseason inventory, $ 37,000 for new hires, and $ 20,000 for upgrades… Level. Level. “The preseason business needs $ 10,000 in advertising to use the funds effectively,” Martinez added.
Anyone looking for a loan should be prepared to explain why they want the loan and how they want to pay it back.
4. Too many loan applications
Some business owners assume that they can cover all their bases by applying for multiple loans at the same time. In this way, they can choose from a multitude of potential offers. However, opening too many loan applications at the same time can be a warning to credit bureaus.
Before contacting potential lenders, entrepreneurs should cooperate. This means that you have all the necessary documents to apply for a loan.
“One of the things that can be problematic when applying for a loan is when business owners don’t have the documents that the bank needs,” Steck said.
Mandatory documentation often includes a detailed business plan and proof of warranty. numerous financial documents such as tax returns, personal and corporate statements, financial and solvency statements; and legal documents such as franchise agreements, business licenses, and registrations.
There are many resources that business owners can refer to when completing their loan application. For example, the Small Business Administration offers a very detailed loan application checklist. Using these resources will reduce the risk of disorganization or lack of preparation.
Careless errors will result in the rejection of the submitted application. “Completing the application incorrectly or missing information is another common mistake that can lead to the rejection of an application,” Tayne said.
Tayne also noted that sloppy accounting and inconsistent business practices, such as mixing corporate and personal invoices or not filing tax returns, could make financing impossible. We recommend that you take the time to gather all the necessary information, complete the forms, and review your application before submitting it.
6. Don’t seek the advice of an expert
When applying for a business loan, lenders seek professional advice.
According to Stephen Sheinbaum, CEO of Circadian Funding, accountants can be a vital source of advice for small business owners in helping SMEs raise working capital. You have worked with the CPA Directory in the past.
“But there are many other places to find good people to talk to, like the Service Corps of Retired Executives (SCORE), a free tutoring service endorsed by the Small Business Administration,” he said. SCORE connects you with retired entrepreneurs who have experience in your market. “This is important because they know what type of capital is most important to the people in their industry.”
Sheinbaum also recommends that entrepreneurs seek financial advice from business groups and search the websites of major alternative lenders, as many have detailed small business resource sections on the many types of capital available and the best ways to prepare for it. financing. .
The local and regional offices of the Veterans Business Outreach Center and the Women’s Business Center are additional resources that provide advice, guidance, and financial support to startups.
7. Failed purchase
Finding a lender can seem so difficult that you may be tempted to sign up with a lender for the first time. However, it is a mistake to blindly follow your lender without considering other options. Take the time to research the various traditional and alternative lenders to find the best solution for your business.
According to Logan Allec, a certified public accountant and founder of the personal finance website Money Done Right, financial institutions in the community where you want to do business are a great place to look for corporate loans. “Start with a social bank or credit union that invests more locally, as they may have special partnership programs with local startups.
The SBA also helps some federal corporations obtain loans from partner financial institutions. “This can be a great way to see if you are having trouble finding a traditional lender for your business,” Allec said.
Other alternatives to traditional lenders include online lending platforms, peer-to-peer lending sites, and a network of friends and family. For the last option, Allec suggests that you draw up an official notarial deed to avoid misunderstandings or conflicts between all parties involved.
When shopping, you can also ask each lender to help you calculate the annual percentage of your loan offer.
“The APRC gives the actual cost of the loan each year. It includes the interest rate and any additional charges and expenses, ”Martinez said. “This is how you can compare different apple-apple loan offers.”
The business loan application process is so methodical that it is easy to forget that it also has an inherent emotional component. Too many business owners simply fail to demonstrate why they are a better loan candidate than anyone else. They’re apathetic with moneylenders, Steck said.
In addition to building a solid business model, why you should qualify for a loan, you also need to show enthusiasm and confidence in your business to attract a lender and make them a believer. To do this, you must tell a story about your business that the lender finds attractive.
“Me and I will be the best in the world” – You have to be in this position and many potential borrowers are not, Steck said.
Weitz repeated that phrase. “The more prepared, serious and passionate your business is, the more confidence the lender will have in approving a loan.”
What are the types of business loans?
You have different types of loan options depending on your needs. Here’s a quick overview of the most popular types of business loans.
These small business loans are handled by participating lenders, often banks. However, because they are guaranteed by the US Small Business Administration, lenders are more confident in paying. Even if the borrower defaults on the loan, the lender recovers up to 85% of his money from the government. The maximum loan amount that can be obtained with an SBA is $ 5 million. SBA loans are in demand for small businesses because the interest rates and terms are lower and softer than many other options.
Short term loan
Short-term loans are typically offered by banks and online lenders and range from $ 5,000 to $ 250,000. They generally pay for themselves in less than a year. Borrowers need up to two days to obtain financing for this type of loan.
Long-term business loans
Rather than financing upfront costs, long-term loans are designed to enable consolidated business growth. They are often not fully repaid over several years, but have a low monthly interest rate. You can usually apply for long-term loans of up to $ 100,000 from banks.
Bad credit loans
Alternative direct or online lenders are often willing to offer financing options to delinquent borrowers. With these lenders, creditworthiness is not a critical acceptance factor. Instead, they take into account cash flows and recent bank statements to determine creditworthiness. While they can usually be approved quickly, you are likely to encounter high interest rates and / or short payment periods.
Secured loans require the borrower to provide collateral, which can be property, vehicles, equipment, inventory, or other valuable assets. Secured loans from banks and credit unions are often easier for startups to obtain and have a lower interest rate than unsecured loans. Loan amounts typically range from $ 50,000 to $ 100,000.
Unsecured business loans do not require any collateral. However, as this increases the risk to the lender, interest rates are often higher and borrowers must have high credit scores to qualify. Internet lenders, including peer-to-peer lenders, banks, and credit unions, often offer unsecured loans as personal loans. Loan amounts can go up to $ 50,000.
Retail cash advances
Merchant cash advances are available from specialized cash payment companies and some credit card companies. It is a loan from the future profits of your business that you pay off with a percentage of your credit card sales. It is a quick way to obtain financing, as it does not require any collateral. This means a faster approval process, but the interest rates can be very high. Often used in retail stores or restaurants. Merchant cash advances can range from $ 5,000 to $ 500,000. The payback period varies from three to 18 months.
Hardware financing is an online loan that you take out to purchase tools or other equipment for your business. No down payment required, saving capital and cash flow. The purchased equipment is treated as collateral for this type of loan. If you do not accept the loan, the purchased equipment will be disposed of. The loan term is two to ten years and the loan amount ranges from $ 100,000 to $ 2 million.
Invoice factoring is when your business sells your invoices to a factoring company for cash. This will help you maintain cash flow in your business. The factoring company is paid after clients pay the balance. Invoice financing helps avoid liquidity bottlenecks, but is generally more expensive than other types of financing. It also limits control and communication with customers. For example, you cannot decide how the auditing firm will receive payment from its clients’ invoices.
How can I apply for a business loan?
When applying for a small business loan, it is important that you understand the information that lenders need to gather the correct data. Typically you will need the following documents:
- Annual balance sheet or profit and loss account for a period not exceeding three years
- Account statement of at least three months
- Accounts receivable reports
Your credit score and history are taken into account. Therefore, having good credit helps. It is generally between 690 and 850. Values below 689 are considered fair credit, while values below 300 are considered bad credit.
Another important factor for lenders is cash flow, as they want to make sure they have enough income and sales to pay. The debt-to-GDP ratio is also crucial – the more debt you have, the harder it is to get approved. For new small business loans, lenders prefer a debt-to-income ratio of 1.35.
Lenders want to see that you have a solid business plan and a consistent profit plan that shows them that you can pay off the loan. This is especially true if your new business is not showing stable cash flow yet.
Some lenders will ask for collateral. As mentioned above, collateral can take many forms: real estate, vehicles, stocks, or valuables. However, you must understand that if you do not pay off the loan, the lender will keep the promised assets.
After applying for a business loan, it can take days, weeks, or even months to be approved. It depends on the lender and the type of loan.