For many businesses, securing a loan is one of the fastest ways to kickstart expansion or help with ongoing upgrades. Applying for a business loan or a bank guarantee for that matter may sound simple, but the reality is that over four in five small business owners are generally denied financing from banks by 2020 estimates. The ongoing COVID-19 pandemic does not help either.
Getting approved for a loan or bank guarantee stems from a variety of challenges facing small business owners. In this article, we will identify some of the unique issues that make it hard to secure small business loans and ways to overcome them.
No collateral. Collateral is either a personal or business property ranging from equipment to real estate. It’s typically required for secured business loans or bank guarantee. It serves as a secondary form of payment if you default. New business owners who don’t yet have business assets may need to use their home as collateral, which we don’t recommend.
The solution here is usually to wait until you own tangible assets, such as properties before applying for a small business loan. If you want to use your property as collateral, take an inventory and see what you’re willing to put up as collateral since you risk losing it if you default.
Insufficient credit. Lenders will look at credit lines and your payment history before making lending decisions to assess your creditworthiness or payment likelihood. Insufficient business credit history may need to rely more on credit reports. Having negative items will make it even more difficult to get approved.
Check your credit by securing a copy of your credit reports. Resolve negative items such as late payments before applying to improve your chances of approval. You can also boost your credit by opening credit cards or other credit forms, making sure to make timely payments while keeping your balances low.
Low income or huge debt. Lenders often check your income to assess your capacity to service your debt. Startup businesses with current huge expenses and with no steady income may have a harder time securing a loan or bank guarantee.
The optimal debt-to-income ratio varies, but you must improve it to improve your odds of loan approval. To reduce your ratio, grow your gross monthly income, increase the amount you pay in debt monthly, and delay non-essential purchases.
Insufficient capital investment. Lenders favor applicants with a reasonable amount of capital invested in the business while still being able to finance their loan. A small business that is overly reliant on funding and hasn’t invested much of its own money is negatively viewed by lenders.
Make investments in your business as your business grows and sales increase. Add new assets to reinvest a portion of your earnings into the business and make sure to pay your debt to boost equity and keep an optimal debt-to-income ratio.
Banks have traditionally been the top choice for small businesses looking for loans and of course, bank guarantee. Around 68% of small businesses that secure traditional sources of credit such as loans will get it from a commercial bank. When shopping for providers it’s best to check their rates first as well as any reviews you can find.