Are Business Loans Hard to Get?
Business loans are hard to get for those just starting out, because without data from at least 2 years of tax returns and other financial statements, banks see the new company as a bad risk. Business loans may not be hard to get for established companies who have a history for payments to lenders and financial statements for profit for several years.
New businesses often need significant capital to start. Getting a significant business loan at no interest can be difficult. There are costs associated with a new businesses such as gaining any materials necessary to create products, special equipment needed to provide services, staffing, phone systems, advertising, and so many other considerations.
Even limiting all these factors so that an entrepreneur can carry out doing business just employing themselves, or maybe one or two others, these costs can still be significant. Without the money to cover these expenses, it is often difficult to turn more profits that would cover costs and allow the business owner to service more clients.
For all these reasons, new businesses especially need the help of banks or lenders to get their start up off the ground. However, it’s no secret that new entrepreneurs face challenges getting banks to consider their new venture. The first factor considered is good credit. Without a personal credit score of at least 650, banks are not likely to consider the applicant at all.
An additional key qualifying factor is having a solid business plan. Showing a bank that research has been done on the target market population, cash flow, and financial projections helps them feel more confident about lending the necessary money for a new business.
Putting together all the details to show that a new business has been well-thought out can be sabotaged in different ways. A new entrepreneur in an established career, or switching from an established career, can be seen as uncommitted, and so a bad risk. Even with every detail accounted for, acquiring a substantial loan large enough for starting costs often comes with very high interest rates.
Some established business people starting a new business are very familiar with their bank managers, or even bank board members. However, these connections do not necessarily guarantee a loan and in fact, can often have no bearing on whether or not the loan is approved. The entire process can be very frustrating, sending an entrepreneur from bank to bank, looking for the one who will take a risk on them.
Banks look much more favorably on established companies with good profits. Their financial statements and tax returns prove profit has been coming in steadily over a few years. These companies can also get venders to vouch for them and have records of their history of payment, which goes a long way in convincing lenders they have the ability to repay loans and are responsible enough to do so.
Part of the suspicion banks harbor towards new businesses are factors such as overspending, underestimating costs, fluctuating markets that cannot be accounted for in the original business plan, and poor marketing that does not draw in customers. All these conditions and more can cause profit loss and negative balances that force new companies into bankruptcy and result in an inability to repay business loans. In such events, the bank may be out the money with little in the way of compensation.
While solidly established businesses can prove to banks these risk factors are not so much in play, there are other hoops to jump through. Good credit is always essential to acquiring a loan, but the established business owner has the advantage of being able to leverage the credit score of the business, providing it is at least 500 or more. This can protect the owner’s own personal score to some extent, or help a business owner qualify, even if their own credit score is low for whatever reason.
Besides a good credit score, collateral is often needed. Getting a business loan without collateral can be difficult. Banks and other lenders want to know how a business owner can guarantee the amount they are loaned in the event that the worst should happen. Take for instance the coronavirus pandemic. This event has been disastrous for the economy and many business owners face closing their doors for good.
Some sort of collateral must be present to show the bank that in the event of an unpredictable misfortune, the loan can be covered. This can come in the shape of a company building, car, or other equipment that can be sold to cover the loan. Entrepreneurs just starting out sometimes do not have anything they can put up for collateral. Those chasing a dream and still young, perhaps just out of college, will have more debt than assets and may not even own a house yet. Immigrants wanting to put their skills to use by starting their own local business also can find themselves without collateral to secure a loan.
Even established business owners can find this a stumbling block. Divorces place a heavy toll by causing high-value assets to be sold in order to be split between ex-spouses. Hard times can cause a business owner to sell expensive assets that would be perfect for collateral, and though a loan would go a long way in being able to keep the lights on and turn the situation around, without collateral, it can be hard to secure a bank loan.
For those lucky enough to acquire a business loan one way or another despite the uphill battle, high interest rates can be stifling. The ability to make more profit by using this startup capital can make this an easy decision, but the slightest difficulty can upset the balancing act of repaying a high interest loan. Repayment amounts can be a tough burden when the interest rate inflates the minimum payment.
There are, of course, other ways to acquire business loans. Some community investment funds will lend small loans to starting businesses in order to support local business ventures. This can work well if the owner already turns some profits and does not have too much in the way of starting costs. For those who can find creative solutions for their problems, this may be the way to go, especially since interest rates are often very reasonable compared to the high interest rates banks offer for loans to new businesses.
Besides community investment funds, credit unions sometimes consider starting businesses, though again, a solid business plan is key to getting approval. Amounts vary but interest rates can be attractive. Planning is crucial, however, since the business owner must first apply to become a member of the credit union before they can hope to apply for any sort of business loan.
A less popular, but sometimes necessary, option is to go through merchant cash advance companies. These lenders are very happy to approve large business loans to those who have good credit scores. Their thought process is that if a business owner has a good personal credit score, they are likely a good risk. The disadvantage here is that these companies usually have very short terms for when their loans become due and the interest rates are very high, often in excess of 60%. For this reason, these types of loans are often called shark loans.
Some business owners are very confident in their ability to make profits and recoup the cost of the loan, plus interest. Payments don’t scare them and the loan gets repaid on time, despite the inflated amount. Others learn too late that they are overconfident in their ability to repay or they take the loan despite knowing its repayment is going to be very difficult. If this is the only way they can get the funds to startup, they may feel like they have no choice.
As with any loan, failure to repay these high interest loans will damage credit, making it hard to continue to do business, apply for credit cards, or acquire any future loans, even with the original loan paid off. Some companies are not fortunate enough to even be in this unenviable position: they find they have to declare bankruptcy, putting a halt to the business venture.
It’s hard to think there is a different way than these conventional methods of acquiring loans, but fortunately, there is. Practically Funded partners are born from a group of entrepreneurs who faced their own frustrations trying to get a loan for starting their own business. They formed a company that finds creative solutions for business owners in search of a loan, whether they are established, starting up, or struggling for any reason.
We do not lend the money, but they have a high knowledge base of no interest credit cards and a vast network of lenders. We know the correct order for application for loans so that an applicant can qualify for the largest amount possible.
Want to qualify for a large business loan, no interest for several months, and without spending days on end recording every detail possible about your business plan? Practically Funded knows how. They can help business owners leverage a good credit score of 650 or more get approved for business loans. These loans are often at least double the amount the business owner initially hoped to get, and are unsecure, meaning no collateral at all is necessary.
Applying is easy to do. 9 simple questions about your contact info, business revenue or if you haven’t started up yet, and credit score is all the information needed. Permission for them to check your credit score is also a must, but the check is a soft inquiry that does not affect your credit score.
Having a business loan can be essential, but even when times are good, having open capital waiting to be used in the event of a rainy day can be the difference between surviving and thriving, or a dying company. These unsecured loans have no interest rates attached to them for 6 months, 12 months, even a year and a half. What are you waiting for? Visit our partner Fundwise Capital today and see what they can do for you.
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