Many businesses were hit hard by the pandemic and struggled financially. In most cases, it is the smaller businesses that suffered more. Prior to the pandemic, a lot of these smaller companies and establishments were doing well and keeping their local economies alive.
Businesses such as small neighborhood stores, those that offer lifted diesel engine trucks, and other types of brick-and-mortar establishments in a commercial district are left struggling financially, especially when foot traffic was significantly reduced because of social distancing and the lockdowns that were implemented.
For most businesses to remain operational today, they had to depend on stimulus checks and business loans. And as helpful as those stimies are, they are not just enough for the survival of an individual and his or her business.
The Challenges of Getting a Business Loan Approved
Times have been made harder by the pandemic for business owners. They now need to look for ways to help finance their business to keep it going to provide a livelihood for people. One of the best ways that business owners can do this is to apply for small business loans. But applying for a business loan has several challenges, too, such as the following:
Poor credit history
One of the first things lenders will look at is the applicant’s creditworthiness. They will check out your business credit reports and use them to assess whether or not to approve the loan you’re applying for. If your business credit report lacks the sufficient credit history needed for the loan, you may use your own credit report. However, if it still contains negative elements, it is highly likely for the application to be rejected.
Lack of collateral
Assets are one of the things that lenders also look at. They want to ensure that you have collateral to offer for their protection in case things don’t go as planned. These assets will serve as your payment in the unfortunate event that you default on your loan.
Not enough capital investment
A lot of smaller businesses and startups get their funding from external sources. Lenders also take into account how much you have personally invested in your business. If they see that your business relies too much on external funding, it might turn off lenders and turn them away from you.
Business loan approval rates are low
As of August 2020, right smack in the middle of a pandemic, only 13.6% of small business loans have been approved by bigger banks and 18.6% by smaller banks. These current low approval rates make it harder for business owners to get loans approved.
Low income with large debt
Lenders will need to see solid proof that you can make timely and correct payments when they give you a loan. Aside from credit history, they also check out a business’ income flow and expenses. If they see that the company does not have a steady income flow and overwhelming expenses, you might have a hard time proving that you can make those monthly payments.
How You Should Address Those Challenges
For business owners to overcome these challenges, they need to do the following:
Create a business plan to go along with your application
Before going to a lender and filling out a loan application form, you need to draw a solid business plan that will help them know what your business is about and how it operates. It will give them an idea of how you can pay back the loan on time. If they see that your business model has a high rate for success, chances are your loan application will be approved
Have collateral secured and ready
Since collaterals serve as a type of secondary payment for loans, make sure that you secure one first before seeing a lender. Come up with an inventory of assets you intend to use as collateral. Just make sure that you’re able to make those regular payments or else you will lose your collateral when you default.
Improve your credit score before applying for a loan
If you’re serious about getting a loan, fix your credit and bring your rating up. Address any late payment issues and always pay on time. As much as possible, maintain a low credit balance, These will help improve your creditworthiness.
Make more investments in your small business
Lenders prefer to give loans to business owners that have invested significantly in their own business and are not heavily dependent on external sources of funds.
Increase your income and lower your debt
Look for ways to reduce your debt and increase your income. Try to delay any non-essential large purchases and make larger monthly debt payments. Doing these will help lower your debt to income ratio.
Business owners need to be more resourceful to keep their businesses operational amid the pandemic. Business loans can be a big help once they have been approved but that should not be the only option and should be the last resort as much as possible.