5 Challenges and Solutions to Getting a Business Bank Loan

09 Feb, 2016 / Comments: Comments Off on 5 Challenges and Solutions to Getting a Business Bank Loan / By

Nobody likes to be rejected. Whether you get turned down by someone you love or from a bank, it is not a great feeling. If you are a small business owner, then you likely know the challenges of obtaining a loan from a bank. In fact, in 2014 only half of small companies that applied for a loan received funding according to one study done by the Federal Reserve Banks. We’ve put together a list of challenges that small businesses face when they wish to obtain a small business loan from a bank, as well as how to overcome them. Here are five challenges of receiving funding and their solutions.


1.  You Have No Credit or Bad Credit

Credit scores measure a business or person’s creditworthiness. In general, a bank will look at both your business and personal credit scores to determine whether they are going to lend to you and at what interest rate. Each business and individual have several different credit scores that is reported to the credit bureaus. However, the three main ones are TransUnion, Equifax, and Experian. One of the main challenges that a small business faces is when they have no credit or bad credit. To overcome this, business owners must work to increase their business and personal credit scores by making all of their payments on time and spending less than their credit limit, as well as keeping all of their credit accounts open.


2.  Cash Flow Challenges

All businesses exist to make money. Due to this, banks will be very hesitant about offering to fund a company that is having cash flow issues. This is because if your business is not making enough profit to start with, then banks will not be willing to hand out a business loan in the hope that it helps your growth. This makes bank funding tough to obtain for very young companies and startups. That being said, startups can try to apply for an SBA loan, which is a loan that is guaranteed by the US government. The majority of larger banks gives out SBA loans, and so make sure that you inquire about it at your local branch.


3.  You Lack Preparation

Some businesses will get turned down for bank funding merely because they did not prepare enough. Often, business owners are not savvy enough when it comes to filing out their application and think that they can simply walk into a bank and automatically get approved. Before you apply for a bank loan, make sure that you have thorough financial statements, projections, and a business plan, as well as bank statements, tax returns, and your business and personal credit reports. You should also bring relevant legal documents such as leases, contracts, and articles of incorporation.


4.  Dealing with Risk-Averse Banks

Providing funding to a small business comes with risk to banks. Due to the 2008 financial crisis, many banks raised their lending standards so that they could avoid taking on such risk. Banks in the post-recession are much warier, and small business loans are riskier than lending out big business loans or even consumer loans. To overcome the challenge of risk-averse banks, you’ll have a better chance of obtaining a small business loan from a community bank, especially if you can create a relationship with the staff.


5.  You Under Capitalized Your Loan Application

Many times, borrowers make the error of under-capitalization when it comes to their loan application. This indicates that they applied using the wrong collateral or lacked the time it takes to complete the application thoroughly. The good news is that there is a variety of collateral and capital that you can draw upon. Make sure that you do your homework to avoid under capitalization and know what capital you have at your disposal. Know what you can pledge to a bank and what you can use to repay your bank loan and grow your business.


William Mahnic
William Mahnic is a Finance Professor at Case Western University and has spent more than 20 years in the finance industry before becoming a professor. Mahnic has appeared as a commentator on both TV and radio talk shows including NPR, Crain's Cleveland Business, WKYC 3 and The Washington Post. He has been interviewed in BusinessWeek, Wall Street Journal and The Los Angeles Times.

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