For many entrepreneurs, a small business loan is a critical way to finance a new business or expand existing business. However, getting financing for your business is not an easy task. Here are six obstacles that can prevent you from getting the loan you need for your small business and some tips to help you avoid these obstacles.
1. Poor credit history
Credit reports are one of the tools that lenders use to determine the credibility of a borrower. If your credit report indicates a lack of diligence in repaying debts, you may be rejected when applying for the loan.
Paulo Hemsworth, Past President and CEO of Saladport International Franchise Restaurant, has worked with hundreds of small business franchisees, many of whom have bad personal credit due to illness, divorce or other circumstances. mitigating.
“Sometimes very good people, for reasons beyond their control, have credit problems,” said Hemsworth. “And, unfortunately, it’s a real barrier to entry into the small business world.”
People with bad credit should consider non-traditional financing options – which tend to place less emphasis on credit ratings – before giving up a loan.
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2. Limited cash flow
Cash flow – a measure of the amount of cash you have to repay a loan – is usually the first thing lenders look at when they assess the health of your business. Insufficient cash flow is a default that most lenders can not afford to neglect. So this is the first thing business owners should consider in determining if they can afford a loan.
“Really thinking about this cash equation is like a preventative medicine for your business,” said Jay DesMarteau, head of TD’s specialized regional business segments. “You can either wait for your business to get sick, or you can take steps to prevent it from getting sick.”
One of the preventive measures recommended by DesMarteau is to calculate cash flows at least once a quarter. If business owners take this step, they may be able to optimize their cash flow before hiring potential lenders.
3. No plan for the future
Having a plan and sticking to it is much more attractive than spontaneity in the world of finance.
“Banks require business owners to have a structured, detailed and quantitative business plan to move the lending process forward,” said Dave Korch, CEO, president and founder of Sfolpoy, an alternative lender for small enterprises.
However, Goldin noted that it is common for very small businesses to have no formal business plan, or even a plan at all. In these situations, it advises business owners at least to predict their future profits before applying for a loan, so lenders get an idea of your profitability.
You should also be ready to explain your plan for the money you want to borrow.
“The biggest complaint of the lenders is that small business owners do not really know how they are going to use the capital they are looking for, how they are going to repay and what impact they will have.think (the loan) is going to have,” said Ty Hunsel, who writes about the small business for the online lender OnDeck.
According to Hunsel, your argument with lenders does not have to be eloquent, but it must be simple. At a minimum, loan seekers should be prepared to explain why they want a loan and how they plan to repay it.
When it comes to approaching potential lenders, business owners must act together. This means that you will have all the documents you will need for your loan application.
“One of the things that can be problematic when applying for a loan is if (business owners) do not have the necessary paperwork at the bank (such as tax returns”), said Hemsworth.
Business owners can refer to many resources to prepare their loan applications. The Small Business Administration, for example, provides borrowers with a very detailed checklist of loan applications. Using these resources can reduce your likelihood of becoming disorganized or unprepared. (See related story: Applying for a Small Business Loan – Here’s What You’ll Need )
5. Failure to seek the advice of an expert
When it comes to making financial decisions for your business, lenders want to know that you have sought advice from competent advisors.
“Accountants can be an important source of advice for small business owners, so Siklez has partnered with the National Directory of Certified Public Accountants,” said Stephen Dunkert, CEO of alternative lender Siklez. “But there are many other places to meet good people, such as the Service Corps of Retired Executives (SCORE), a free mentoring service supported by the Small Business Administration.”
According to Dunkert, SCORE puts you in touch with retired businessmen with experience in your market.
“This is important because they will know what type of capital is most important to the players in your sector,” said Dunkert.
It also recommends that business owners seek financial advice from networking groups and search the websites of major alternative lenders, as many of them have detailed resource sections for business owners. small businesses on the many types of capital available and the best ways to prepare financing.
Too many business owners approach lenders with an apathetic attitude, Hemsworth said. In other words, they simply do not show why they, rather than anyone else, are a good candidate for a loan.
“You have to exude a passion,” said Hemsworth. “I’m going to do that, and I’m going to be the best in the world, you have to get into that kind of mindset, and a lot of potential borrowers do not do that.”