Businesses need money. Without money, businesses cannot buy inventory. They cannot pay the rent. They cannot buy equipment. A lack of money explains why many people never even try to start a business. Many new start-ups quickly run out of money, so they need to get a loan to finance their business. Unfortunately, many businesses find out they cannot get a loan. Maybe your business tried to get a loan and failed. The following reasons explain why.
Tight Bank Credit Standards
Many businesses and their principals have good financial credentials, but still do not secure loans because of new lending rules imposed by banks and by the government. Many banks have billions of dollars of cash on hand, but they do not loan the money out. Regulators and banks crafted these policies after the crash of large investment firms. Several rounds of government stimulus programs infused the nation with trillions of dollars of extra cash that also impacted the behavior of banks. Some experts say that the banks earn more money from dealing with the Federal Reserve than they do dealing with businesses. Regardless of the reason, you might not get a loan for your business because banks do not want to give you a loan.
Fewer SBA Loans
When banks evaluate your loan application and determine that you represent an elevated risk, banks normally turn to the Small Business Administration. The SBA can guarantee more than half of a business loan, making borrowing possible for thousands of businesses who otherwise could not borrow. The flood of SBA loans before the recession began has slowed to a trickle for two reasons. First, banks can earn more profits from a loan originated and financed without the SBA. Many banks will only issue non-SBA loans. This choice helps boost the prospects of investors and executives. Risk comprises the other reason.
Banks have found out that the SBA will refuse to pay out a loan guarantee if they find errors in the paperwork. The SBA has started examining underwriting documentation with a fine-tooth comb and has cost banks millions of dollars in lost funds. Therefore, many bankers hesitate to ask the SBA to approve a loan.
Bad Credit or No Credit
If you have a poor credit history, you will have trouble starting a business. Most banks look at the financial records of business principals before issuing a loan, especially when a business has little or no credit history of its own. Even if you have outstanding credit, you might not get a loan because your business has either bad credit or no credit.
Many owners have trouble developing business credit until their business has operated for several years. After that period, a business has a track record. The business can now show how it pays its bills, how many products and services it sells and what profit margins it achieves. Until then, many business owners turn to a cash advance online provider. These companies often join forces with merchant payment processors to allow businesses to borrow money and develop a credit record.