Why is it so difficult to get a loan from the bank?
The entrepreneurial world is exciting – and challenging. If starting and running a successful small business was an easy and simple undertaking, there would be more small business stores than cars on the road. The small business world is constantly evolving and presenting new landscapes that entrepreneurs can maneuver. Perhaps the most common challenges are getting the funding to support business projects and goals.
The financial landscape
There are many options for small business entrepreneurs when it comes to seeking financing for their operations. Depending on the specific needs, business owners can seek financing from traditional loans, microloans, credit card allowances, personal loans, cash advances and other resources.
Although the range of financing options has increased over the decades, there is not necessarily a significant percentage of entrepreneurs receiving more funding. In fact, getting financing is often one of the most difficult processes for entrepreneurs. They are not all eligible for small business loans and are left out of frustration that prevents them from moving their business forward.
Meeting the challenges of the financial landscape
According to a report by Nav – The US Small Business Dream Gap Report – a statistically significant number of small businesses are struggling to balance operating costs, unplanned expenses and financial fluctuations. Up to 25% of business owners are now struggling to plan for their unexpected expenses – those rainy moments that they know will eventually happen. One in five small business owners also said that because of cash flow-related issues, they had considered closing their doors.
In fact, over 50% of business owners surveyed had to solicit additional financial resources over the last five years to support their small businesses. More than 25% of business owners reported having solicited funding more than once during this period.
During this five-year period, 20% of small business owners who applied for funding were denied. Nearly half of the people who were refused said that the refusal was not the first and almost a quarter of these owners said they had no idea why they had been denied funding.
These types of financial barriers have led many of these business owners to change their business practices, not positively, which would encourage the growth and expansion of their businesses. They did not hire employees as they wished and needed to hire. They could not access items such as additional products or secure marketing and the expertise to propel their businesses into the future.
Perhaps even more frightening figures show that more than 60% of these companies used their personal savings to cover the necessary expenses and more than a fifth of them used credit cards to cover their expenses. One-tenth of business owners surveyed accepted funding from their family or friends. When all these numbers were calculated and completed, less than 40% of business owners were able to receive funding during the five-year period examined in the survey. This is the financial landscape for small business owners trying to access the capital needed to grow their businesses.
Why is the financial landscape so trendy?
An interesting link appears when we look deeper into the financial landscape. We find that the link is that an alarming number of small business owners are not able to correctly interpret their credit ratings. Almost half of those surveyed did not even know that such results existed and, overall, almost three-quarters did not know where to find this information. The number of small business owners who could interpret their results was insufficiently limited – about 20%.
What can we do?
It is quite clear that the ability or inability of a small business owner to easily obtain financing, if needed, has a direct impact on their ability to succeed. Evidence suggests that there is a correlation between financial literacy and access to finance for small businesses, so the solution must also be educating small business owners.
Just as individuals and their financial institutions use the Fair Isaac Corporation score to determine credit risk, corporate credit scores should be given the same or greater respect. Small business owners who do not appreciate the severity of their commercial credit score could otherwise use personal loans and credit cards to try to throw bandages on the much larger financial stressors of their businesses. The results are all too often a persistent injury, resulting in late payments and accumulated payments that become unmanageable, and ultimately, credit scores to businesses that have a significant and negative impact on the ability to access future funding.
The FICO Liquid Credit rating service (FICO SBSS) is an excellent example of the tools used by banks to assess the risks associated with term loans for small businesses. These risks include the risk of late payment. The overall scale ranges from 0 to 300, and small businesses must be able to obtain a minimum score of 140 to be considered for Standard Loan 7 (a).
One of the problems that adds to the confusion is that when a lender refuses a small business owner, that lender is not required to provide the reason for the denial. To this end, it is imperative that business owners take the initiative to know their current scores and, if necessary, improve and improve them before applying for such loans. Strengthening the credit history of small businesses is one of the most important steps these business owners can take.
Various services are available to provide, for a fee, corporate credit ratings. Crediteriol offers a subscription service that allows business owners to get their scores online.
Knowledge is power
There is something in this old saying that knowledge is power. Nav’s poll reiterates this point. Business owners who were not aware of their credit ratings were only very optimistic about their future growth – at an expected growth rate of only 5%. Conversely, among those who knew their scores, they envisioned a 20% growth in their future earnings. Actual credit ratings may not be relevant, but business owners were overall more confident and ready to make informed decisions. In addition, the more business owners had an overall understanding of funding options, the more likely they were to get the funding they needed. They also found it easier to find the most beneficial types of funding sources.
When business owners become empowered and take steps to learn as much as possible about all aspects of business management, they will be more likely to access the financing they need, which will increase their rates. of overall success.