A recent study on the state of financing for small businesses show that as much as 82% of U.S. small businesses have their loan applications denied when they apply to a bank. Banks are simply not enthusiastic about lending money to small businesses – a disheartening revelation if you consider the fact that small businesses are the bedrock of a country’s economy. Below are four reasons banks are usually reluctant to lend money to a small business.
1. The creditworthiness of the business owner is questionable
When a bank lends money to a small business, it is taking a risk on the ability of the business to repay the loan within the term and with interest. Unfortunately, the creditworthiness of the business is only half the story, the creditworthiness of the business owner is a more reliable insight of the ability of the small business to repay the loan. If you can’t provide the necessary proof showing the quality of your creditworthiness, you are not likely to get a loan even if your business finances are in order.
2. Lending to a small business is not profitable
Banks are in business to make money – lending money to a small business is not always a smart business move for banks. To begin with, small businesses typically apply for loans less than $500,000. The problem however, is that it takes the bank about the same amount time to evaluate, verify, and process a small loan and a larger loan. Unfortunately, a small loan amount will earn the bank a lesser amount of money in interest rates than a loan with a larger amount. Hence, banks tend to reject many small loans so that they can focus on bigger loans that will earn them more money.
3. Lack of documentation reduces credibility
Banks are traditionally conservative; hence, they tend to think about the worst-case scenario – your inability to repay the loan – by default. The onus however is on the business owner to provide documentation showing that the business has the capability to repay the loan. Some of the documentation you’ll need to provide include a business plan, bank statements, credit report, income tax return, and financial statement.
4. Financial regulations make some businesses ineligible
Financial regulators are serious about avoiding a repeat of the global economic meltdown of 2008 and they have created regulations to prevent its reoccurrence. Some of the regulations have tightened the lending standards for both business and individual loans as part of efforts to protect borrowers from predatory loans. You’ll need to be ready to endure a grueling loan approval process in which every tiny bit of information about your business finances will be scrutinized. Any hint of a grey area on your finances might automatically cause your application to be rejected.
An innovative solution for accessing business loans
Online lending club reviews reveal that small businesses might find it easier to receive funding from online lenders than from traditional banks. Online lenders will be inclined to consider your application if your business is at least 12 months old and you record at least $50,000 per year in revenue.
Online lenders have different loan solutions that could help your business access short to medium-term financing. Online lenders typically offer business installment loans that can be issued in one lump payment and repaid in monthly installments over time. You can also expect to access competitive interest rates and quick time to funding. The best part is that you won’t be required to pay an application fee for the loan and there are no prepayment penalties.