The most common facility that SME’s turn to for finance is banks. Unfortunately many small businesses get turned down by the banks for loans. There are a number of reasons for this, here are the main ones and how to avoid them.
1. Bad Credit
Bad credit is always going to affect your ability to get loans. It comes down to risk and how high the bank perceives the risk that you represent. Obviously doing everything you can to protect your credit rating is critical, however, if you already have a credit rating problem you can still get credit. It will mean though that you will have to compensate the banks risk in some way, such as increased interest rate or using your personal assets as collateral.
2. Limited time in business
Most businesses go out of business, which makes banks cautious. Therefore if you have a long history of a strong business they are more comfortable with the risk you represent. Therefore, those seeking finance in their first couple of years are going to have to jump through a few extra hoops to prove their ability to stay in business. This may mean showing the banks contracts with customers or using personal finances to show your ability to repay regardless of the businesses success.
3. Limited Collateral
Because business banking can be high risk the bank will generally want all loans to be collateralised. This means that if you borrow $100,000 then you will need to provide them with an asset worth $100,000 that they can protect their investment with. For example if you have $200,000 equity in your home and you want to borrow $100,000 then if you fail to repay the money they bank may repossess your house to claim their money back.
You will struggle to get business finance if you don’t have assets that the bank can use as collateral for the business loan.
4. Weak Cashflow
Cashflow is always a struggle for small businesses. But if you have a loan repayment that needs to be paid every fortnight or month you need to show that you have a steady enough cash flow to cover this. Can you change your invoicing and payment terms to improve cashflow? Can you change terms so that you get money in advance rather than arrears or change payment terms from 14 days to 7 days? You may also be able to create a product that is paid faster and more regularly than you main income.
For those that struggle with collecting payments and have clients that pay late, there is an abundance of new invoicing technology that chases payments automatically. This can increase the speed at which you receive payments and reduce your stress in chasing them up personally. You may also find that providing additional payment methods for your customers will help such as credit cards.
We recommend speaking to our accountant for advice on how you can position yourself in the best way possible for gaining finance in your business.