The ability to access more capital is essential for ensuring the financial health and stability of a business. However, many businesses, particularly small businesses, discover that accessing capital is not easy due to many bankers’ reluctance to extend sufficient credit access or capital. Without access to capital, many small businesses suffer cash-flow related problems preventing either expansion or sustainability of the business. In this article, we will explain the 4 main reasons why small businesses have difficulty in accessing capital, and we will offer you solutions and resources for each problem.
Accessing More Capital: Problems and Solutions
Problem # 1: Poor Business Credit Score
Most people are aware of the negative consequences related to having a poor personal credit score, such as having to pay a higher interest rate on various types of loans and credit cards balances. In fact, someone with a sub-550 credit score may find it difficult to get any loan at all from a reputable lending institution. In a similar manner, businesses that have a low FICO SBSS business score will have difficulty in securing capital in the form of loans and lines of credit. The FICO SBSS score is used by banks to rank businesses on their ability to make on-time payments.
Solution: First, you have to understand the difference between personal credit and business credit. Then, focus on improving the second one. If you still have questions about your business credit and your credit report, Experian can help you.
Problem # 2: Inadequate Cash Flow
After the “dot-com” bust of 1999-2001 followed by the real estate crash of 2007-2009, banks have become very cautious about lending to businesses that do not exhibit strong, positive cash flow. Before allowing a business access to capital, banks verify that the business has sufficient cash flow to cover both the monthly loan payments and normal operational expenses such as payroll, property and inventory costs. If lenders decide that a business is a default risk because of an inadequate cash flow, then access to capital will be difficult to come by.
Solution: Start by deeply understanding what cash flow is and how it affects your business. To calculate your own cash flow like a pro, click here. Then, focus on the strategies you need you optimize your small business cash flow.
Problem # 3: Bank’s Risk-Averse Behavior
Whereas large corporations have little difficulty in accessing capital, banks restrict access to capital for small businesses and they significantly increase their rates. Since the Great Recession, banks have tightened lending standards restricting many businesses from accessing capital. As seen in the previous recession, small businesses are particularly sensitive to a cyclical economic downturn, so lenders factor in the likelihood of default when considering allowing access to capital. Higher interest rates on loans and increased collateral requirements are but a few of the requirements leveraged on small businesses as a result.
Solution: Getting “bank-ready” is a long process, that starts by building a strong, long-term relationship with your lender. Learn here the tips to become a better lender and improve your chances for a loan. And don’t forget to read our Ultimate Guide to Getting a Business Loan where you’ll find all the resources you need to guarantee your bank’s approval.
Problem # 4: Fixed Costs for Small Loans
There are fixed costs associated with any loan or line of credit: underwriting fees, loan origination fees, and processing fees. As a result of these fixed costs, it is more expensive for banks or other lenders to extend capital access to small businesses. Lenders make significantly more profit on a $2,500,000 loan than a $25,000 loan. This leads them to focus more on providing loans to larger companies at the expense of smaller businesses. Furthermore, since small businesses tend to have little publicly available information, evaluating the overall financial condition of a small business often is an expensive proposition. In such a situation, lenders choose to forgo extending access to capital to avoid incurring the greater cost and risk associated with these loans.
Solution: Visit us! We know that In today’s business climate, accessing capital is a challenging task for many businesses, but Camino Financial is determined to provide a solution. Read our Community Letter: No Business Left Behind!, where you’ll learn about our determination to provide capital for small businesses. Learn also about our Express Loan: it could be the solution for your business you’re looking for. Our business loans have a low-interest rate, and you could receive your loan in two days. Don’t believe us? Check for yourself! You just have to click here to calculate how much would be your monthly payment. We hope to see you soon!