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Small businesses can’t rely on banks

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Business owners have a plethora of choices when looking for financing to fund their business growth depending on what stage their business is in given its life cycle. Business owners can start, seek outside investors, or seek bank financing. Whichever route is ultimately taken, the injection of capital is essential for a company to enter new markets, hire additional employees, offer new products or purchase necessary inventory and equipment.

Many business owners believe that bank financing is often the path of least resistance. Unfortunately, recent studies, and even our own anecdotal evidence, indicate otherwise. According to EasyKnock, “Big banks still reject nearly 80% of loan applications from small businesses.

Credit reports

Lenders use credit reports to determine a borrower’s ability to repay debt. A credit report provides detailed information about credit history, the amount of debt the business owner is currently maintaining, and whether bills are paid on time. A favorable credit record shows that a business and its owner(s) can meet their financial obligations on time and would therefore bode well for their chances of obtaining a bank loan. Sometimes, however, new companies don’t have a very limited credit history or operating history and are usually rejected by a major bank.

Limited cash flow

Cash flow measures the amount of money available to repay a loan. A business with cash flow problems is unlikely to get a small business loan. Lenders want to see a reliable and stable stream of income. But what happens when a business is seasonal? Usually, banks will consider such a circumstance as insufficient cash flow and reject a potential borrower’s loan application.

Weak business plan

A business must plan for the future by researching its market, setting revenue goals, and projecting sales growth. Lenders want to make sure business owners have a plan and strategy for how they intend to use the loan proceeds. The underwriting models that banks use are based on risk assessment. A company with a limited operating history, a lack of collateral, or an inadequate business strategy will rarely pass a bank’s strict underwriting guidelines.

1 https://www.easyknock.com/blog/small-business-loan-denial-reasons-and-what-you-can-do

There are alternatives to traditional bank loans that business owners are beginning to explore. Online lenders – such as merchant cash advance companies – and crowdfunding sites are two of the most popular alternatives. Although there are trade-offs, private credit tends to be more streamlined in its application process, flexible in its use of products, fast in its approval process, and provides almost immediate cash disbursement. However, interest rates tend to be much higher. It remains to be seen whether Congress will find new ways to encourage big banks to support the backbone of the US economy – small businesses. We can only hope.

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