Why getting a small business loan is difficult
Getting a small business loan is difficult
Unfortunately, financial institutions are notoriously reluctant to lend to small businesses – according to a recent survey of more than 10,000 business loan applicants in the United States. 82% were denied funding for their bank. Small business lending, especially start-ups, is a riskier proposition for banks than mortgages or loans to larger and more established businesses.
In addition, since underwriting costs related to the valuation, auditing and processing of a small loan are substantially the same as for a larger one, banks can increase their profits by focusing on larger loans for larger loans. large companies (small businesses usually require loans of less than € 500,000). In addition to being denied funding more often, small businesses typically pay higher interest rates on loans than larger firms.
Consider that you can have an excellent credit rating and a solid business plan without being able to get a small business loan because you have no collateral. Even well-established businessmen may find themselves in this situation if they do not have enough tangible assets, such as houses or other assets.
In other words, the small business loan is not granted based on the status of your business; it is granted on your personal financial situation. That’s why it’s important that your personal financial home be in order before applying for a small business loan.
You will also find that many lenders simply do not provide start-up capital. While they are perfectly willing to give a loan to a small business to help a business grow, they do not want to take the risk of lending to a start-up.
That said, you are more likely to get a small business loan if you know where to look and if you are ready to meet the lender’s expectations. Keep in mind that the primary consideration of lenders is risk management and that approval will depend on their assessment of your ability to repay the loan.
Increase the chances of success of a loan application
In addition to a sufficient guarantee, financial institutions will need the following before considering a loan application:
- A business plan describing your business, your products, your target market, your people, your cash flow, your financial projections, etc. Banks review their business plans to ensure that their fundraising activity is likely to be successful. As such, the business plan must demonstrate a sound business model, based on sound management.
- If you are an established business, information such as loan / credit history, bank accounts and other supporting financial information. You should also include customer accounts and receivables, as well as vendor references indicating that you have a long history of timely payments. Finally, include balance sheets, company tax returns and (if possible) audited financial statements for the last few years of activity.
- A personal financial summary, including details of assets such as real estate, vehicles, investments, etc.
It should be noted that banks also often require creditor insurance for business loans, which covers the repayment of the loan in the event of death or disability of the business owner (s).
Credit unions can be a better choice than banks
Credit unions are an increasingly important source of funding for small businesses. According to the Huffington Post: “Since June 2007, with the onset of the financial crisis, outstanding loans to small business credit unions have more than doubled, growing slightly above 130% over the period. period “.
Credit unions are smaller institutions that focus more on local communities. They are therefore more likely to lend to small businesses in their communities. Banks, on the other hand, have become larger and more national (and international) through mergers and acquisitions. The larger the institution, the less likely decisions are (like the loan policy) at the local level.
Examples: Steven’s small business loan application was rejected because he had no guarantee.
Community Investment Fund
Community Investment Funds are non-profit organizations dedicated to helping people who can not obtain the loans they need to take out loans from a traditional credit institution (such as a bank or a credit union). often because they do not have the necessary credit. the history or collateral required by a traditional lending institution. Some of these community loan funds will also help people with poor credit histories (although they will probably insist that you consult a credit counselor).
So, if you do not have a credit history or guarantees because of a divorce, because you are a new immigrant or because you are young, or if your credit rating is bad because of problems with repayment, your local community loan fund may be willing to give you a small business loan.
Your business must be local, however. Community investment funds get their working capital from their own communities. While a given fund may be supported by the government, most of the loan funds come from investments requested from churches, service groups and local businesses.
Different community loan funds have different loan parameters, do not write them immediately as a potential source of start-up money or money to grow your small business. If you are looking for a small business loan, especially a loan to start a business, it is worth checking with your local community loan fund to see if you qualify.
Before applying for a community investment fund
Each of these community loan funds wants your application to contain a solid business plan. If you do not have one, my Business Plan Writing Series starting with the Business Plan Sketch will guide you through the writing process.