Why Small Businesses Face Challenges When Applying For Business Loans: An Analysis

Applying For Business Loans

When it comes to strengthening the business, loans are hard to come by for small businesses. Banks and other financial institutions are wary of the creditworthiness of small businesses for several reasons. A capital cash infusion at the right time can prove to be a boon for a small business. It can help them- 

  • Get over a difficult period, like the one existing now during the COVID-19 pandemic. 
  • Allow them to diversify and open up different models and verticals to help growth. 
  • Attract new professionals, buy newer machines or ramp up production for emergencies. 

Regardless of the kind of business, loans can be a vital cog to help organizations stay afloat or prosper as the case may be. Leading experts have gone on record to say that the loan proposal and application of small businesses are more likely to be rejected as compared to their bigger counterparts. 

In this resource article, we try to shed some light on the above findings. Specifically, we list down some important reasons that act as challenges for small businesses. 

List of 5 Main Challenges in front of Small Businesses when applying for Loans

1. Limited and Restrictive Cash Flows

Small businesses suffer from an acute problem when it comes to regular cash flows. Their payment schedules are irregular and this casts doubt over their creditworthiness when applying for loans. This is because lending institutions want to see whether you have enough cash coming in every month to pay back interest and EMIs. Cash flow is a major concern. 

2. Poor Business Plans and Way Forward

No bank is ever going to give you a loan simply to tide over a difficult situation. They will however give you a loan if you can show that you are going to use their money to grow the business. In this regard, a solid business plan becomes a very important aspect of getting a loan. If you have a course of action in place, you stand to make a better case for getting the loan. 

3. Negative Credit Scores and Financial History

Many small businesses have sketchy financial records when it comes to paying back debts. According to UK Credit, a leading financial lender, this is a serious red flag for any institution. If a small business has a credit score that is lower than 700 points, it is very likely that its loan application is going to be rejected. A better option is to fix it earlier before applying. 

4. Incomplete and Irregular Paperwork

When it comes to possessing the right paperwork, financial institutions are likely to be more stringent with small businesses. Documentation is very important when applying for a business loan. This includes income tax records, licenses, registrations, and permits. Banks are also going to scrutinize the bank accounts and balance sheets of the small business. 

5. Not Taking Help from Experts before Applying

One of the many mistakes that small businesses make is not taking help from an expert who is familiar with the entire process. For example, a Chartered Accountant or a Business Lawyer can be the correct person who can guide a small business in the right direction. They can also help in getting all the paperwork in order and cover all the bases to make a full-proof application. 

The Importance of Business Loans for Small Businesses

For a very long time, private corporations have worked with financial lenders to grow operations. You might have heard the age-old addendum, ‘money makes money. According to experts, there are three major benefits of availing of a business loan:

  1. A business loan helps an owner or an entrepreneur keep complete control of their business. This is different from raising capital for an investor who is more likely to take an active interest in the day-to-day operations and decision-making of the business. 
  2. Taking business loans is a fast and immediate way to infuse capital into a business. The loan disbursal is fast and you can immediately put the money to good use. This helps saves time and starts the turnaround process quickly. 
  3. Many business owners try to max out their credit cards to get the financial resources that are required. Business loans come with lower rates of interest as compared to credit cards and make more financial sense for small businesses. 

The Final Word

In this article, we have tried to look at some important points regarding business loans for small businesses. We have discussed some of the major challenges that small businesses face, along with shedding light on some of the major advantages of business loans. If you have any other questions you would like us to answer, let us know in the comments section below.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.