Running a business is great, fun, and exciting, until you are running out of money and operational expenses continue to rise. Entrepreneurs often need to raise money for a myriad of reasons ranging from startup capital and product development to expansion projects.
When the need for business financing arises, most business owners tend to put a loan application form together, head up to their bank, and then hope that their loan application is successful. However, the uninspiring reality is that raising financing for small business is tough. This piece provides insight into why it is hard to get funding for small businesses from traditional financial institutions.
- Banks don’t make much money on small business loans
One of the reasons small business owners find it somewhat difficult to secure financing from traditional financial institutions such as banks is that banks do not have compelling reasons to lend money to most small businesses. Banks makes some of their revenue in the form of interest that they charge on the loans they give out. However, the amount of money that most small businesses want to borrow usually doesn’t yield enough interest payments to worth the while for banks. Banks are in business to make money, and they tend to make the least money by providing loans to small businesses.
- Many small business owners can’t provide enough documentation
One could honestly argue that the documentation process required to obtain small business loans are designed to frustrate all but the most committed business owners. You need to meet business credit and revenue requirements that are out the reach of most new or struggling businesses. You’ll also be required to provide tons of documentation such as resume, personal background, business plan, business credit report, financial statement, income tax returns, bank statements, legal documents, and collateral among others.
- Regulations are stifling the amount of loans available to small businesses
After the global financial meltdown that rocked the world in 2008, financial regulators decided to tighten business lending standards to stop lenders from giving out questionable loans and in order to protect borrowers. Monetary authorities have gradually started loosening the hold on business lending requirements; yet, you can expect to undergo a serious vetting process before you can get a business loan from traditional financial institutions. Unfortunately, the vetting process could run for a couple of months while you’ll be in limbo and hoping that the bank doesn’t find a reason to deny your loan application.
- Your personal credit can make or mar your application
Businesses are traditionally incorporated to stand alone as a separate entity from their owners. However, most banks will refuse to separate your personal creditworthiness from the creditworthiness of the business when you need to secure a small business loan. Hence, if the business owner has a troubled credit history or less than decent credit score, the odds of getting a business loan are already stacked against you.
Here’s how small businesses are looking for financing from other sources
Many business owners have started coming to the realization that a traditional bank is not always the best place to secure business funding. Now, business owners are embracing the financing services offered new generation lenders. A new breed of financial services company is coming up to provide businesses with easier access to capital. These new lenders use technological solutions to factor business loans quickly and reduce the wait time for business owners.
However, it is important to note that it might be somewhat more expensive to get a business loan from these new lenders. For instance, small business loans with most Australian banks have an ongoing loan rate of 5.32% per annum. The small business overdraft rate stands somewhere around 6.52% per annum. However, if you choose to get a business loan from one of the online lenders, you can expect to pay upwards of 10% in interest on the business loan.
Interestingly, many business owners don’t mind getting a loan at a higher interest rate inasmuch as they can be sure of a less bureaucratic process and a faster processing time. In fact, some online lenders can make a decision in a matter of hours or within a couple of days after you send in a completed loan application.