Have you recently been turned down for a small business loan? If you think getting a business loan is tough, it’s not your imagination. A 2014 Harvard Business School study revealed that bank-approved SMB loans dropped 20% after the financial crisis in 2008.
Some business owners are afraid to apply for financing in the first place. They’ve bought into myths about why they might be denied for a small business loan. If that’s you, you’re strangling your own business. So let’s talk about what’s really going on here.
Back in 2012, the National Small Business Association published results of their Small Business Access to Capital Survey. It wasn’t pretty. They said, “The prospect of getting financed as a small business – even in a growing economy – is very difficult simply due to the fact that many small businesses lack the assets necessary for a traditional bank loan.”
Between 2008 and 2012, 43% of SMBs needed money but were not able to find a lender. Today, small businesses have many more options for funding. But they still feel stymied. And they are still struggling financially:
- Almost 30% say it’s harder than ever to reduce operating costs.
- 25% say it’s tougher to plan for unforeseen expenses.
- 20% say they have considered closing shop in the past year. They see no relief for cash flow problems or their inability to grow.
- 53% said they have tried to get a merchant business loan or line of credit within the past five years. Half of them tried more than once.
- 20% were turned down, almost half of them multiple times, yet 23% said they weren’t even told why.
- Just 36% of small business loan applicants actually received funding.
The truth is, myth and reality can blur, depending on your circumstances. Perceived reasons for loan denial could be true for one business but a myth for others. Today, small business funding needs and solutions are as diverse as businesses themselves. Yet too many small business owners assume all loans and lenders are the same. That’s the biggest – and most dangerous – myth of all.
Myth #1: I didn’t have perfect credit
Lots of small businesses have less-than-ideal credit. Or even genuinely bad credit. If so, banks will probably deny your application. But wait. Banks are not your only option. So you’re wrong to assume your low FICO score is a deal-killer.
It IS a myth that bad credit means automatic small business loan denial. So you can’t use that as an excuse to suffer without the funding you need to grow your business. You simply need to look elsewhere. In fact, the right financing program can help improve bad business credit. Our United Capital Source (UCS) lending experts can tell you more about this.
Myth #2: No bank would have approved me
Every bank uses somewhat different criteria to make business loan decisions. They all look for a strong credit score, established time in business and proven sales history. But they may take other factors into account. Smaller community banks tend to be more small business-friendly than large institutions. Maybe you approached the wrong bank. Did you do your homework before applying? Did you ask what criteria your bank uses? Or what you could do to improve your business loan application?
You can shop your application to different banks, but UCS can help you find non-bank alternatives that could be a much better fit.
Myth #3: The SBA turned me down
The Small Business Administration has programs that support borrowing, but the federal government does not lend money. An SBA-backed loan may be an excellent choice. Especially if you want to purchase equipment or real estate. You’ll automatically have collateral, and you’ll have several years to repay.
But you’ll still have to go through a bank. SBA support may boost your chances of approval, but it’s not guaranteed. At UCS, we can help you decide if an SBA loan is your best choice. If so, we can match you with the right SBA-savvy bank.
You may have heard it takes months to get an SBA loan. That’s not necessarily so. If your business meets certain criteria, our UCS team can help you get approved quickly, with a simple application process. You’ll get a low interest rate, too.
Myth #4: I didn’t have a 40-page business plan
You may be a natural-born entrepreneur. But operating by the seat of your pants doesn’t instill confidence in lenders. You have to show them something real. It doesn’t have to be lengthy, but it does have to be well-thought-out. Having a business plan that includes marketing and finance components shows you’re thinking strategically.
Even better: include a finance expert as part of your business support team. You don’t have to be a lending expert. You don’t have to waste time puzzling through various small business loan options. With UCS, you have a working partner that knows your industry’s quirks. Your UCS account rep knows your business, inside and out. We’ll be there as your company grows and changes. That’s the kind of business plan that boosts your bottom line.
Bear in mind that any lender has to believe you can repay them. They will want to know what you plan to do with the money. How will it benefit your business so you can pay them back?
Myth #5: I didn’t have enough collateral
That might be true. Some types of businesses have tangible assets they can use as collateral. Retailers have saleable inventory.Manufacturers have parts and supplies. Contractors have fleets of heavy equipment. Your medical practice may own your clinic facility. But a lot of businesses don’t have much in the way of assets.
Fortunately, there are financing options that do not require collateral. So lack of hard assets is not necessarily cause for denial. For example, your best-fit financing program might be something like:
- Accounts receivable loans, or factoring. You sell your receivables to a third party (at a discount). You get the money right now, and they are responsible for collecting the receivables. You can do this on a regular basis, if need be. A/R financing can be an excellent way to smooth cash flow and make your income more predictable. For this reason it is increasingly popular with small businesses.
- Merchant cash advances. These are similar to A/R loans, except they are based on debit and credit card receivables. For some small businesses, merchant cash advances provide an alternative means to repay traditional business loans.
- Inventory financing. You can pay for new inventory by using those goods or supplies as collateral. You can also use existing inventory as collateral to borrow money for some other purpose. Banks are often skeptical about inventory financing, because it can be a headache for them if you default. But alternative lenders can be a viable resource for this.
- Business line of credit. This works like a revolving credit card, but interest rates are much lower.
The point here is that you have options, even if you have no collateral. Which solution is right for your business, right now, depends on a variety of factors. Those include how much money you need and what you plan to do with it, your industry, maybe even the season. That’s why it can be tough to uncover the best option on your own. And why partnering with UCS can point you in the right direction, quickly and with minimal hassle.
Myth #6: I didn’t ask for enough money
Your Uncle Jack told you small businesses have to borrow at least $50,000 to be considered for a merchant loan. Someone else told you that minimum was $250,000. But you didn’t need nearly that much, so you asked for less. And you were denied. Should you have listened to Uncle Jack and tried to borrow more?
No. Uncle Jack meant well, but he was wrong. Sure, banks like to make huge loans. They make more money. But borrowing more than you need just puts you in a bind, even if you qualify. The bigger the loan, the bigger the payments. That’s cash you could be using for something else. Expanding your product line. Or your staff, your store – or your own salary. Why saddle your business with unnecessary debt?
You do have options, even if you don’t need a lot of money. Maybe a short-term business loan. Or a micro business loan. The key to smart financing is borrowing the right amount, in the right way, from the right lender. That depends on what your business needs today. That’s why at United Capital Source, we get to know your business first. Your goals. Your people. Your day-to-day challenges. Then we can explain the best options. And we can match you with the right-fit small business loan program.
Myth #7: They didn’t believe I couldn’t make the monthly payments
And they may be right. Perhaps the real issue here is that monthly payments are the wrong solution for you. Many small businesses have uneven cash flow. Sometimes it’s hard to predict. Sometimes it’s seasonal. Those conditions don’t lend themselves to big monthly payments. Here at UCS, we get it. That’s why we offer five different payment options. You can choose the one that works for you – other than monthly, you can pay:
- A percentage of your credit card transactions
Perhaps you would be better off with no fixed payments at all. As we’ve already noted, there are funding options that don’t require traditional payment plans.
Myth #8: I have too much debt
The truth is, if you’re in over your head, you’re not a reasonable risk. No one can help you. But is your business really a lost cause? Many small businesses wind up in debt. You need money, so you take whatever you can get. You run up business credit card balances. You aren’t thinking holistically. Or long term. Excessive debt is a symptom. The real problem is lack of financial strategy.
On the other hand, a lot of small business owners fear debt. They think all debt is bad. They believe the myth that says borrowing money is only for losers. A last resort. This is fundamentally wrong, but it’s a common misconception among entrepreneurs. Again, the real problem is lack of financial strategy.
It takes money to sustain and grow your business. If too much debt or fear of debt are holding you back, partnering with UCS can give you new perspective. We can help put you in the black.
Most Business Loans Are Denied for Legitimate Reasons
Any of the reasons we’ve discussed can result in denial of your small business loan application. You may never know exactly why you were turned down. What matters most is that lending myths can serve as “red herrings” that derail your efforts to find the funding you need. To grow your company, you must separate fact from fiction.
Today, you have diverse financing options. You’ll find greater flexibility even if your business isn’t the perfect candidate. But that doesn’t mean you should slack off on improving your financial standing. Far too many entrepreneurs don’t pay attention to their business credit score. Or even realize their business has a FICO score. Fiscal responsibility starts with knowing where you stand. That way, you know what’s needed to improve your credit.
Meanwhile, don’t buy into the myths. Borrowing is a smart, proven way to manage your business finances. When you’re proactive, it’s easier to plan and grow. But you have to do it strategically. That’s where we come in.