Financing for small businesses is not always approved. There are many reasons for this. Some businesses may be approved more easily than others even though they have all met the minimum requirements.
Your business type is one of the main factors that influenced your lender’s decision if you were recently denied a loan. This article will examine how your business type affected the decision of your lender, what types of businesses pose a risk to lenders, and provide tips on how you can secure funding.
What is the importance of your business type to lenders?
Before approving a loan, lenders will look at all of your qualifications and requirements. Your personal and business credit score, your business’s location, your business’s history, and your detailed business plan are all important factors that they take into account. Your business type and industry are also taken into consideration.
For economic reasons, traditional lenders such as banks and credit unions are generally against new businesses and startup companies. For many years, economists and policymakers alike have explained that small businesses have more difficulty obtaining funding than larger companies due to a lack of collateral, a poor credit rating, unmanageable debts and other factors.
About 32 million small business exist in the United States. A Federal Reserve data revealed that 30 percent of small business loan requests were denied and 26 percent qualified for only a portion the money they requested. Some 63% of applicants for loans did not apply because they were afraid of being rejected.
Lenders also consider your industry in addition to the size of your business. Many businesses were severely affected by the lockdowns and restrictions on operations during the pandemic. However, these experiences are not uniform. These measures had a negative impact on industries like education, travel, accommodation, food service, and transportation. Many of them were forced to close permanently.
Lenders are therefore reluctant to lend to small companies in these industries. Due to the economic instability, lending money to these businesses is not only more risky but also more expensive. Many traditional lenders would not lend you money if they knew that your company might fail before you could repay them.
It is uncertain whether SMEs can adapt to the changing market. There are still ways to secure funding, regardless of the size or type of your business.
Does your business type affect your loan application process? What to do
Lenders will consider your business type and sector to determine whether you qualify for a loan. You can also show other evidence to demonstrate your creditworthiness. Here are the best ways to prove your creditworthiness.
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- High credit ratings are a sign of good credit.
Your credit score is an overview of your credit history. It tells you whether or not you’ve paid your debts and bills on time. Your credit score will be high if you have a good track record of paying your bills on time. Low credit scores indicate that you’re a risky lender.Fair Isaac Corporation (FICO), also known as FICO score, is responsible for determining your credit score. This three-digit number summarizes your report. Your credit score must be 600 or higher to qualify for a small-business loan.Five factors are involved in obtaining a high FICO Score: your payment history (35%), the total amount of debts you have incurred (30%); length of credit history (15%); credit mix (10%) or how diverse of credit types that you have had over time; and new credit applications ( 10%).
These five elements are helpful, particularly if you want to improve your credit score.
- Cash flow should be positive
Small businesses must demonstrate a positive cash-flow, especially when they apply for a loan. Lenders will want to know that your business is healthy, and that it generates cash flow. This way they can be sure that you’ll repay the loan in a timely manner. Positive cash flow is when a business has more money coming in than it’s spending.You can boost your cash flow in many ways. You can, for example, offer more discounts or better marketing of your products and services to bring in new customers. You can also reduce unnecessary costs by using cheaper suppliers and outsourcing some work. - Provide collateral
You need to provide collateral for small business loans, as most are considered risky by lenders. This is especially true if you apply to traditional lenders.Lenders need collateral because it gives them some assurance that if the borrower defaults, they can recover at least part of their investment. Small businesses can also benefit from collateral by increasing their lender’s confidence that they will be able to repay the loan.You can use anything as collateral, from your vehicle or home to your equipment or inventory. Remember that lenders can seize collateral if you are unable to pay back your loan.
- Other financing options are available
Last but not least, explore alternative financing options for your business. You have many options as a small-business owner to get capital from lenders who are more suited to your needs.If you are unable to obtain a bank loan, working with alternative lenders can be a good option.Some lenders are more lenient with your credit score and business type. If you can demonstrate your ability to make timely payments, your chances for getting approved for small business funding will increase.
- High credit ratings are a sign of good credit.