Sometimes even the most lucrative businesses need funding, and sometimes that funding is hard to come by. But, why? Why do some businesses need an alternative small business loan source instead of the regular options? Well, the answers may be surprising, but they can help you better understand the mainstream business funding industry.
Poor Credit History: When reviewing a business loan application, a credit history is one of the first things that lenders look at. A good credit score shows that a business owner has a solid handle on their personal and business credit, which is what every lender likes to see. On the flip-side, a poor credit score doesn’t instill confidence in lenders. A business owner with a sub-par credit rating might not be able to meet the financial obligations that are set forth in the loan agreement.
Cash-Flow Issues: Entrepreneurs start businesses to make money. Cash flow is the money that moves in or out of a business over a specific time frame. If a company is selling lots of its products or services and doesn’t have exorbitant operational expenses or debt, it most likely has a positive cash flow. Companies that have cash flow problems presents lenders with risk, because there is always the chance that the loans might not be repaid. Cash flow represents the “health” of every small business, and it is an important factor in the loan approval process.
Limited Collateral: Small businesses that are just starting out, or that don’t have sufficient cash flow or credit, will need to pledge collateral when applying for a bank loan. Collateral will also be required if the company has defaulted on a previous loan. Companies with a limited amount of collateral will face challenges when trying to secure bank loans. Business owners should consult with their lenders to find out which types of assets or property can be used as collateral. This might include cars, trucks, real estate, business equipment, and investments. If the business loan is not repaid, the bank can acquire the collateral and sell it.
If your bank loan was rejected, there are other financing options available. First American Merchant, for example, is a direct lender that offers several business loan products that don’t require collateral or a near-perfect credit score.
