Why is it so hard to get a small business loan from a bank?

Small Business LendingHow to obtain a business loan is a common concern for start-up businesses and those preparing to scale.  So how do you get the banks to say “YES”?

Getting approved for a business loan or line of credit is usually more difficult than qualifying for a personal loan. It’s crucial that small business owners are adequately prepared when meeting with a lender to present their business in the best possible light.

“Rocking up to a bank and asking for a business loan because you believe you have a kick arse idea is just not enough.”

Business loans are never guaranteed until the papers are signed, so here are some tips to streamline the loan approval process for your small business.

Are you a risky customer?

One of the most important parts of any business loan application is demonstrating to a lender that your business is able to make regular repayments and ultimately be able to repay the loan in full. If your business is profitable, you can show you’re a low risk by presenting cash flow statements, a detailed business plan and, of course, your good credit history. Some of the most common reasons a bank won’t grant a loan to a small business are a lack of security (e.g. no business assets), a poor or non-existent credit history, business inexperience and/or a weak business plan.

We always recommend a minimum 24 month cash flow forecast listed month by month to show that even with loan repayments the business will still be able to meet other financial obligations such as Tax Office requirements, Payroll requirements and repayments of any other debt already in existence.

What is your credit score?

It’s highly recommended that you review your credit score before you apply for a business loan.  Yes – before you apply. That way you will know whether now is actually the best time to apply. Check that your report is complete or free of any errors that can affect your score. Your credit report includes your payment history for credit cards, equipment leases, mortgage or office rentals, electricity, phone fees and other business expenses. A simple omission – say your internet provider, whom you always pay on time, isn’t included in your payment history – can result in your credit score being lower than it should be, so be sure to correct any errors immediately.

Ondeck have a great tool which will assess your credit rating – and it is free to use.  Head to their site here and see what your result is.  Surprises, when seeking business loans, are never good surprises so it is best to be armed with information.

Bigger is not always Better

Nowadays, it is not just the “Big 4” banks which can lend you money. So don’t be deterred if they say no as there are certainly other options for you.

There are many smaller financial institutions, credit unions and money lending services that are well worth the investigation.  The smaller credit unions might not have the ability to service a huge loan, so always understand what you are asking for and if you are asking the right service provider.

Other options such as Moula or Ondeck – can assess small business loans based on your financial information in your accounting software and usually the process is online so can be quicker to get a result.  These are usually short term loans, but could also be worth a look based on your needs.

“No matter how you seek funding, you should always be able to justify the loan.  Not just in passion, but in a meticulous, planned, anal-retentive, numerical way.”

Banks, credit unions and financial lenders all still have the same general requirements.  In order to lend you money, they need to be assured that you have the ability to repay the loan.  Understanding your cash flow position for the next 24 months is crucial, including both internal and external obligations.  Passion is one thing, but banks will rely on data to assess you – so go in there fully armed with all the answers, and you are well and truly on your way to receiving the answer you are looking for.

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