Loans are an important part of business, whether you like it or not. They play an integral role in keeping a business operational. All businesses encounter challenges that make it difficult for them to move forward with certain projects and tasks. For instance, a good hydro excavation company cannot fulfill a project if it doesn’t have enough funds for equipment maintenance and fuel.
Financing is important and one of the primary ways business owners get funds is through the acquisition of business loans. However, getting approved for a loan is a different matter altogether.
What are the typical challenges of getting a business loan approved?
Applying for a business loan isn’t as easy as one would think. Certain challenges present themselves in the process.
Bad credit history
There are so many disadvantages to having bad credit. One of them is the very big possibility of getting rejected on a loan application. Lenders are wary of people coming to them with bad credit as it typically reflects a person’s creditworthiness.
Lack of capital
Most lenders look favorably at business owners who have invested a significant amount into their business. If a business owner is largely or solely dependent on external funding, lenders are more likely to turn down a loan application.
As much as lenders want to help business owners and entrepreneurs with their financial concerns, they also need to protect themselves. This is why collaterals are integral in any loan application. Collaterals serve as secondary payment should the borrower default on a loan.
Low approval rates
Due to the pandemic, banks and lending companies had to implement stricter guidelines for business loan applications. As of August 2020, it was reported that bigger banks only had an approval rate of 13.6% while smaller banks were slightly higher with 18.6%, but still a lot lower than the usual numbers.
Large debt, low income
Another thing that lenders look at is how well a business is doing as far as income and debt are concerned. They take a close look at how the finances are doing in an establishment, like how much regular income comes in and if it can sustain monthly loan payments. They also check a business’ outstanding debts and expenses.
How can you overcome these challenges?
If you want to increase your chances of getting a business loan application approved, you need to do the following things first:
Get your creditworthiness up before applying for a loan
As stated earlier, lenders consider the applicant’s credit score when deciding to approve or reject an application. If your credit score is low, or you believe it’s not enough to get your loan approved, put the application on hold and give yourself time to work on improving it first.
Make sure you secure collateral first
It may take you some time to acquire tangible assets that make for acceptable collaterals but it is the safest way to go about it. However, if you already have properties that could be used as collaterals, make an inventory and identify which ones you’re willing to risk losing in case of the unfortunate event that you default on your loan.
Come up with a solid business plan and attach it to your loan application
No lender is willing to hand money over to a business that has no clear direction and goal. Create a business plan that outlines what the company’s goals and objectives are, the business model, marketing strategies, and other important aspects of your business operations. This will appease lenders and give them more confidence in you.
Get your income up as you lower your debts
Your business’ debt-to-income ratio shows how your debts and expenses fare against your monthly gross. A good ratio shows lenders that you can make on-time monthly payments.
Add to your investments in your business
It would work best for you if you don’t rely solely on external funding to keep your business operational. Lenders have more confidence in applicants that have a significant amount of money invested in their own business.
Look for other financing options
It would be best if you also have a few options to choose from. Shop around and look for a few lending companies that offer the best loan packages suitable for your line of business. By doing so, you are increasing your chances of getting approved. However, don’t send out numerous applications all at once. Thinking that you’re covering more ground is not exactly the right mindset when applying for a loan as it can be a red flag indicator for credit bureaus.
When it comes to business, knowing where to get the right funding and how to manage your finances will either make or break you as a business owner. No matter how great your products or services sell, if you don’t know how to handle your business’ financial affairs, it will all be for naught.
Loans are quite helpful only if you know how to make them work for you. Otherwise, if you keep mismanaging your earnings, no loan in the world could save your business from going down. At the end of the day, that’s all a loan is: a tool for success. So if you’ve been fortunate enough to have your loan approved, exercise prudence and be discerning with the money.