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For many entrepreneurs, a small business loan is an essential way to finance a new business or expand existing operations. However, obtaining funding for your business is no easy task. Here are six barriers that can prevent you from getting the small business loan you need and a few tips on how to avoid these roadblocks.
Credit reports are one tool lenders use to determine a borrower's credibility. If your credit report shows a lack of past diligence in paying back debts, you might be rejected when applying for a loan.
Paul Steck, former president and CEO of the international franchise restaurant Saladworks, has worked with hundreds of small business franchisees, many of whom have bad personal credit as a result of illness, divorce or other extenuating circumstances.
"Sometimes, very good people, for reasons beyond their control, have credit issues," Steck said. "And, unfortunately, that's a real barrier to entry in the world of small business."
People with bad credit should consider nontraditional financing options — which tend to place less emphasis on credit scores — before giving up on getting a loan.
Cash flow — a measure of how much cash you have on hand to pay back a loan — is usually the first thing lenders look at when gauging the health of your business. Insufficient cash flow is a flaw that most lenders can't afford to overlook. Therefore, it's the first thing business owners should consider when determining if they can afford a loan.
"Really thinking through that cash-flow equation is like preventative medicine for your business," said Jay DesMarteau, head of regional commercial specialty segments for TD Bank. "You can either wait until [your business] gets sick, or you can do things to prevent it from getting sick."
One of the preventative measures DesMarteau recommends is to calculate cash flow at least quarterly. If business owners take that step, they may be able to optimize their cash flow before approaching potential lenders.
Having a plan and sticking to it is much more attractive than spontaneity in the finance world.
"Banks require that business owners have an organized, detailed and quantitative business plan in order to move forward with the loan process," said David Goldin, CEO, president and founder of Capify, an alternative small business lender.
However, Goldin noted that it's common for very small businesses to not have a formal business plan or any plan at all, for that matter. In these situations, he recommends that business owners at least forecast their future earnings before applying for a loan, so lenders will have an idea of your profitability.
You should also be prepared to explain your plan for the money you want to borrow.
"Lenders' ... biggest single complaint is that small business owners aren't able to articulate very well how they're going to use the capital that they're looking for, how they're going to make repayment and what impact they think [the loan] is going to have," said Ty Kiisel, who writes about small business for online lender OnDeck.
According to Kiisel, your pitch to lenders doesn't need to be eloquent, but it must be straightforward. At the bare minimum, loan applicants should be prepared to explain why the want a loan and how they plan to repay it.
When it comes to approaching potential lenders, business owners should have their act together. That means having all the paperwork you'll need for your loan application on hand.
"One of the things that can be a problem when applying for a loan is if [business owners] don't have the documentation that the bank will require [such as] back tax returns," Steck said.
There are plenty of resources that business owners can refer to when putting together their loan applications. The Small Business Administration, for example, provides a highly detailed loan application checklist for borrowers. Using these resources can decrease your likelihood of coming across as disorganized or unprepared. [See
When it comes to making financial decisions for your business, lenders want to see that you've sought guidance from knowledgeable advisers.
"Accountants can be an important source of advice for small business owners. That's why Bizfi has partnered with the National Directory of Certified Public Accountants," says Stephen Sheinbaum, CEO of alternative lender Bizfi. "But there are many other places to find good people to talk to, such as the Service Corps of Retired Executives (SCORE), a free mentoring service that is supported by the Small Business Administration."
According to Sheinbaum, SCORE connects you with retired businesspeople with experience in your market.
"This is important because they will know about the kind of capital that is most important to people within your industry," said Sheinbaum.
He also recommends that business owners get financial advice from business networking groups and conduct research on the websites of the leading alternative funders, since many have detailed resource sections for small businesses about the many kinds of available capital and the best ways to prepare for funding.
Too many business owners approach lenders with an apathetic attitude, Steck said. In other words, they simply don't demonstrate why they, rather than someone else, are a good candidate for a loan.
"You have to exude a passion," said Steck. "I'm going to do this, and I'm going to be the best in the whole wide world. You have to go into it with that sort of mentality, and a lot of [potential borrowers] don't do that."
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