Why is it so hard to get a loan from the bank?
The Finance Landscape
There are many options which exist for small business entrepreneurs when it comes to seeking finances for their operations. Depending upon the specific needs, business owners might seek funding from traditional loans, micro-loans, credit card allowances, personal loans, cash advances, and other resources.
While the range of financing options has increased over the decades, there are not necessarily significant percentages of entrepreneurs receiving more actual funding. In fact, securing financing is often one of the most difficult processes for entrepreneurs. They do not all qualify for small business loans, and left spinning in the wake of frustration unable to move their businesses forward.
Meeting the Challenges of the Finance Landscape
According to a report published by Nav – The Small Business American Dream Gap Report – a statistically significant number of small businesses have difficulties balancing operating costs, unforeseen expenses, and financial fluctuations. As many as 25% of business owners now find it harder to plan for those unexpected business expenses – those rainy day moments they know will eventually happen. As many as one in five small business owners also report that because of challenges like this with cash-flow that they have considered closing their doors.
In fact, more than 50% of the business owners surveyed have had to apply for additional financial resources within the last five years in their efforts to sustain their small businesses. More than 25% of business owners reported seeking funding more than once in this time frame.
In this five year period, 20% of those small business owners who applied for funding were denied. Almost half of those who were denied say that the denial was not the first, and almost a quarter of those business owners reported having no idea why they were denied the financing.
These kinds of financial barriers led many of these business owners to change their business practices – and not in positive ways that would encourage the growths and expansions of their businesses. They didn’t hire employees like they wanted and needed to hire. They could not access things such as additional products or secure marketing and expertise necessary for propelling their businesses into the future.
Perhaps even more frightening numbers show that more than 60% of these businesses accessed their personal savings to cover the expenses needed, and more than one-fifth of them used credit cards to cover expenses. A tenth of those business owners surveyed accepted financing from family or friends. When all of these numbers were said and done, less than 40% of the business owners were able to receive financing during this 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 enterprises.
Why is the financial landscape trending like this?
An interesting connection appears when we further examine the financial landscape. We see that the connection is that an alarming number of small business owners are not able to adequately interpret their business credit scores. Almost half of those surveyed were not even aware that such scores existed, and overall, almost three-quarters were not aware of where to find this information. The number of small business owners who actually knew how to interpret their scores was insufficiently small – approximately 20%.
What can we do?
It is fairly clear to see that a small business owner’s ability or inability to readily and access funding as needed directly impacts his or her ability to succeed. With the evidence leaning towards a correlation between financial literacy and small business funding access, the solution then must also lie in educating small business owners.
Just as individuals and their financing institutions use the FICO (Fair Isaac Corporation) score as a means of determining lending risks, business credit scores must be given the same, if not more, respect. Small business owners who do not appreciate the gravity of the business credit score might otherwise use personal loans and credit cards to try to throw bandages on the much larger financial stressors of their businesses. The results are far too often a seeping wound, resulting in late payments and accruing payments that become unmanageable, and in the end, resulting in business credit scores that significantly and negatively impact the ability to access future funding.
The FICO Liquid Credit Small Business Scoring Service (FICO SBSS) is a prime example of the tools that banks use to evaluate the risks for term loans for small businesses. These risks include the potentials for late payments. The overall scale ranges from 0 to 300, and small businesses must be able to obtain a score of a minimum of 140 to even be considered for the typical 7(a) business loan.
One of the issues adding to the confusion in the matter is that when a lender denies a small business owner, that lender does not have to provide the reason for the denial. To this end, it is imperative that business owners take it upon themselves to know their current scores, and as needed, build and improve upon them before they apply for such loans. Strengthening the small business credit history is one of the most important steps these business owners can take.
Various services are available which will provide, for a fee, business credit scores. Creditera offers a subscription service where business owners can obtain their scores online.
Knowledge IS Power
There is something to this old adage that knowledge is power. The survey from Nav reiterates this point. Those business owners who were not aware of their business credit scores were only minutely optimistic about their future growth – at just 5% anticipated rates of growth. Conversely, of those who were aware of their scores, they envisioned their growth to be 20% in future earnings. Perhaps the actual credit scores were not relevant, but the business owners were more confident overall and ready to make informed decisions. Also, the more the business owners had overall understandings of financing options, the more likely they were to obtain the funding they needed. They also had an easier time finding the types of funding sources that would be most beneficial.
When business owners empower themselves and take measures to learn as much as possible about all aspects of business management, the more likely they will be to gain access to the funding they need, thus raising their overall business success rates.