The ability to access capital is essential for ensuring the financial health and stability of a business. However, many businesses, particularly small businesses, discover that the access to 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 7 main reasons why small businesses have difficulties to access capital, and we will offer you solutions and resources for each problem.
How to Access 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. This makes especially hard to access capital. 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 it difficult to access 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 to access 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. Learn here how to calculate your own cash flow like a pro. Then, focus on the strategies you need to optimize your small business cash flow.
Problem # 3: Lack of Collateral
Banks often require collateral before they agree to approve a loan. Collateral is any physical property that can guarantee the repayment of a loan and thus make it easier for businesses to access capital. However, new businesses may not have the equipment or real estate to offer as collateral, or they may not be willing to use their personal assets, like homes and cars, as collateral.
Solution: Some online lenders offer funding alternatives that require no collateral. But have in mind that they may include higher interest rates than traditional bank loans. Before agreeing to the terms of a loan, make sure you’re aware of the interests involved. Some lenders will let you calculate this amount even before starting the application process. And even if the interest rate may look higher than at a traditional bank, keep in mind that after a few payments you can graduate to a better loan with better terms and lower interests.
Problem # 4: Lack of Preparation
Some banks turn down small business loans because the businesses’ owners aren’t prepared. They are no familiar with the application process. Many businesses owners believe they can walk into a bank, fill out an application, get approved for a loan and easily access capital when the reality is that the process requires a lot of preparation even before you step in the bank for the first time.
Solution: Before applying for a bank loan, businesses should have a written business plan, financial statements or projections, personal and business credit reports, tax returns and bank statements. They should also have copies of relevant legal documents including articles of incorporation, contracts, leases, and any licenses and permits needed to operate. The process of applying for a traditional bank loan can be overwhelming. Remember that you can find alternatives where the process is much simpler and the criteria are more flexible than in a bank: at Camino Financial you are only required to submit basic financial records, and this can be easily done online.
Problem # 5: Bank’s Risk-Averse Behavior
Whereas large corporations have little difficulty when it comes to access 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 borrower 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 # 6: Seeking Small Loans
Most small businesses seek loans of less than $100,000. However, banks want to underwrite larger loans because it’s more profitable for them. It costs a bank about the same amount to process a $50,000 loan as it does a $1 million loan, but obviously, they can make more money by underwriting the latter.
Solution: As a small business owner, we understand a million dollar loan is not your goal. Camino Financial offers microloans as low as $5,000, ideal for informally run microenterprises.
Problem # 7: 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, finding ways to access 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 loans: they could be the solution 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 use our calculator to calculate how much would be your monthly payment. We hope to see you soon!