Money borrowed from a financial institution by an entrepreneur to start, run, or expand a small business is known as a small business loan. While it may sound simple in theory, the process is a bit more complicated than just filling out some basic forms and hoping for a positive outcome. In fact, over four in five small business owners were denied financing from banks big and small by 2020 estimates.
When it comes to common challenges faced by small businesses, here are just five scenarios you may run into as a small business owner.
Poor or insufficient credit
Entrepreneurs with limited business credit history face an even more challenging time when proving their creditworthiness and may have difficulty getting their loan approved.
When making lending decisions, lenders generally review and consider credit lines and past payment history in your personal and business credit reports. These help determine your creditworthiness and likelihood of repaying your loan on time. If you’re a new small business owner with little or no business credit history, you may need to rely on your personal credit report to obtain a small business loan. Therefore, if your personal credit report contains negative items, obtaining a small business loan may be difficult.
Lack of collateral
Collateral is real, personal, or business property, such as real estate, vehicles, or equipment, a borrower pledges to a lender to secure the payment obligations of the loan. Most business lenders, including the small business administration (SBA), will require collateral to secure the loan obligations in case the borrower defaults on its payment obligations. New business owners, especially those with a limited business credit history, may need to pledge personal collateral, such as their personal home or personal vehicle to secure the loan. This means that if the business owner defaults on the loan, the lender can seize the business owner’s personal vehicle to fulfill the obligations of the loan in whole or in part.
Low Approval Rate
According to Fundera, the approval rate for business loans at large banks, including the SBA, is only around 25%. At small banks, the approval rate is higher—around 49%—but more than half of borrowers still are denied a loan.
Revenue
In addition to your personal or business credit history, a lender may examine your business’ revenue to determine your capacity to service the debt. As such, businesses overburdened by expenses that haven't generated steady revenue may have a harder time demonstrating an ability to repay the loan.
The amount of revenue that a lender requires to approve a business loan may vary from lender to lender, including traditional versus online lenders.
Insufficient capital investment
The amount of capital invested in a business by the owner or owners can also affect the approval of a business loan. A small business with limited capital investment may have a more difficult time obtaining a loan than a business with large reserves of capital.
Contact CCHA for your Business Services needs
The Business Services Team at CCHA is available to help with business formation, commercial transactions, business financing, tax plans, business succession planning and more. Contact us for all your legal business matters and trust we have your best interest at heart and will help set you up for success. Whether facing these or any other legal challenges, CCHA is equipped to help you reach your goals.
Recent Blog Posts
#CCHACares: Carmel Youth Assistance Program
CCHA Law is pleased to highlight a nonprofit organization in Carmel that CCHA Law is proud to support. Carmel Youth…
Is It Possible to Get Child Custody Modification in Indiana?
When the needs of your family or child evolve, you may find that the existing arrangements for parenting time and…
What Is the Punishment for OWI in Indiana?
An operating while intoxicated (OWI) charge in Indiana can throw your world into a tailspin. It’s natural to wonder what…
