Even if you haven’t experienced it, every small business owner knows how challenging it can be to get a bank loan. If you want to boost your working capital then don’t get disheartened. We’ve got some insights to share that will help you understand why banks and small business loans are a challenging mix.

By taking a look at what this means for you, we’d like to suggest some alternatives that might work for you if you’re a small business looking for a loan.


Business loans and paperwork - Making small business loans work for you

Spreading the cost

Banks are big businesses with complicated support structures and consequently large overheads. To calculate profit by loan they split up their costs equally for each transaction and measure their return. The result of this is that loans need to be big to be profitable, while small or short term loans will struggle to make a positive contribution. It’s important to understand that banks value you as a customer, but that as a small business you may be failing to get their full attention because you are not making them money.

The Rule Book

Like many other businesses, banks operate to a rule book which doesn’t necessarily exist in paper, but does dictate how they will function in order to grow their value and protect their investments.

Unfortunately the bank’s rule book is not traditionally designed with small businesses in mind. That’s why when you look for a loan with a bank you’ll often be asked for things that you can’t or don’t want to provide. These include: security (usually through real estate); evidence that you have been in operation or profit for a number of years; and detailed documentation that captures the financial position of your company.

Small businesses can often be untraditional in their operation and structure, tend to be new when they are seeking capital investment, and often don’t have security available to support their loan. So for a bank to qualify a small business for lending they will usually have to go through a lot of paperwork and build a 1:1 relationship in order to understand your position. That’s making a transaction that is already perceived as unprofitable even more costly.

Risky business

Statistically if your business is young, not yet profitable or has a small number of employees, there is a much higher chance that you will be forced to close your doors and cease operation. That doesn’t mean that it’s going to happen, but banks work in statistics and are aware of the risk.  This means that they’re either going to reject your application or make you work much harder to borrow their money. That’s why you can expect to have to complete a lot of paperwork to get your loan application ready, without any guarantee that you will receive the money at the end of the process. Even if you manage to do the paperwork you will probably also need security in order to be able to complete your application.

What can you do?

Applying for money from the bank can feel like a difficult process but don’t let that put you off proceeding. If you do want a bank loan you’ll find it a lot easier now that you are aware of the challenges we have outlined and why they are in place. Proactively gathering the right documentation and information will be a great starting point for your application. Try to keep your attitude positive throughout – even if it gets frustrating. Although you may not be approved for a loan this time, it’s always worth keeping your bank on side for the future. Make sure you get feedback on why your application was declined so that you can understand where the opportunities lie next time you apply. If your loan application is declined then ask your contact at the bank to recommend an alternative provider who might be able to assist you in your search for working capital.

Review your alternatives

The good news is that the bank is no longer the only reliable provider of business loans in the market. The growth in unfulfilled demand for small business loans has made this a growing market for alternative providers. These new and existing finance companies have designed their products with a focus on small business customers, so you can expect benefits such as: reduced or removed requirement for security; straightforward application processes – often completely online; fast turnarounds; and 1:1 support.

If you would like to explore the alternatives but are not sure where to start, you could begin the process by asking your business network to recommend providers that have worked for them. Draw up a list of benefits or challenges that your loan needs to deal with and complete some desktop research to draw up a shortlist. Then if you want to understand the service you can expect from each company you can give them a call and ask some questions pertinent to the service you would like to receive.

In many ways, getting a business loan with a company is a commitment to a partnership which will result in the growth and success of both your businesses. When you consider it from this perspective there can be no doubt that both partners need to be happy with the relationship in order for it to be successful. If you find that you are unable to borrow from a bank, it doesn’t mean you will be unable to borrow. Choose your alternative provider with care and you could find that you benefit from a range of features that have been designed with your business success in mind.

Invoice Finance, Cashflow Solutions and Business Loans

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