You may already be aware of how difficult it can be to get a bank loan. But rather than allow yourself to get swamped with the frustration of not having access to the working capital that you need – we would like to share with you some simple insights into why banks find it challenging to approve loans for small business owners.
We’re going to take a look at what that means for you, and check out the alternatives that are available if you still need to apply for a loan.
Banks are large corporations with complex infrastructures and big fixed costs. When they break down the profitability of a loan or customer, they traditionally opt for equally apportioning their costs across each loan and calculating their return. This means that a large loan looks incredibly profitable while a small loan will barely register on their profit radar – if at all. This doesn’t mean that they don’t want you as a customer, but their focus in terms of their operating procedures and infrastructure will be on finding and growing profitable business.
The Rule Book
Although not actually something you can lay your hands on, every small business person understands that the bank is operating to a rule book that both helps them protect their own and their investor’s assets while ensuring that they grow their business and their opportunities.
The problem for you is that, as a small business, the rule book is not designed with you in mind. Banks need security – which you may not have. Banks usually require businesses to have been in operation – or profit – for a period of time. Banks, like other lenders, also seek to monitor the financial condition of the businesses they lend to – which is not always easy with small businesses.
The long and short of it is that for a bank to obtain the information they would like to have about your business, they probably need to build a 1:1 relationship with you in order to assess the viability of any loan. Spending 1:1 relationship time with your least profitable customers would be questioned in most businesses, so don’t be surprised if it may not seem attractive to your bank.
The biggest issue that banks have in lending money to small businesses is the potentially higher risk that they will not get their money back. If your business is new, not turning a profit, or has a small staff count; then you are waving statistical red flags to the bank that you may not be around to pay back the loan that they give you. Banks will require a lot of documentation to even process a loan request, and there is of course no guarantee that you will get funding at the end of it. If you do pass the paperwork test you will also probably require collateral such as real estate security in order to be able to proceed with your loan.
Don’t let the difficulty of the loan process put you off applying for the funding you need. If you do decide to apply for a loan with the bank, then do it with your eyes open to the potential challenges. Why not take the time to bring together all the information that the bank may need to process your request? By being proactive and approaching the process with a positive attitude you will have made a good impression for future opportunities, even if you don’t get approval for your loan today. And if you do get turned down, then take the time to find out why you didn’t meet the lending criteria. You could also ask your bank if they can recommend an alternative lending solution or provider who they think might be able to help you.
If you are looking for working capital to support a small business then it’s worth considering the alternatives to borrowing from the bank. The demand for small business lending has grown dramatically and there are many alternative providers who have sprung up hoping to corner the market.
What does this mean for you? Many new lenders have designed their product and service around small businesses and their finance needs. They offer products which are easier to apply for, fast to turnaround, can be managed for short periods of time, and in some cases require no security. Many providers have taken the time to understand their customers in detail and have also tailored their products to meet industry specific needs and challenges.
If you are considering using an alternative provider then take the time to canvas your network for recommendations based on what has worked well for them. It might be worth drafting a wish-list of the product and service features that you would like to receive and then do some desktop research to identify which providers can offer you the closest match. Once you’ve drawn up a short list then take 15 minutes each to give them a call and get a feel for the kind of products and services they could offer you.
Borrowing from a bank can be a very challenging process if you are a small business. But being forewarned means that you can do everything possible to make your loan application successful. If you are not able to borrow from a bank, or you choose not to, then be aware that there are many alternative providers available who have designed their products specifically to meet small business needs. And once you have selected your preferred provider you could quickly get access to the working capital you need to take the next step in the growth of your business.
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