Why 80% of Small Business Loans are Being Rejected
January 2, 2020 (Investorideas.com Newswire) They say that the best way to get a loan from a bank is to prove to them that you don't need it. This statement rings uncomfortably true for small business owners.
The big banks are approving a record number of small business loans these days, but they are still rejecting 80% of applications. That means 4 out of every 5 applicants are not getting the funding their small business may need to grow, or even survive.
Here's a brief look at why it is so hard to get a small business bank loan, and which application criteria small business owners are having the hardest time living up to.
A Minimum of Four years in Business
Right out of the gate, if you have not been in business for at least four years, you're best looking into other funding solutions for your small business outside of the major banks. Their application process is very number and formula-driven, and this is the first number that people have trouble with.
Only about 60% of new businesses even make it to their fourth year. Ironically, cash flow problems are the number one reason that most small businesses fail. This means many of those businesses that close up shop before the 4-year mark may have been saved by an influx of cash.
A Minimum Credit Score of 680
A bank is going to take a deep dive into the personal finances of you and any other applicable business owners involved.
Your personal credit history is very much going to influence how risky banks will deem your business. If your credit score is below 680, you might be out of luck. The average personal credit score in America has grown from 683 to 693 over the last 7 years. However, a (relatively) low credit score would still be a major obstacle for about half of all applicants.
Annual Business Revenue Over $180,000
This can be another non-starter for a lot of businesses.
Even if you meet the personal credit requirements and you've been in business for over 4 years, banks won't really see you as a worthwhile investment if you don't have enough revenue to prove to them you can reasonably pay them back.
This leads to the classic vicious cycle. You need money to invest to boost your sales, so you need a loan. But you can't get a loan because your sales are too low.
Equity Near $1 for Every $4 of the Loan Amount
And finally, major banks want to see a certain level of equity in your business.
Again, this is often a major problem for small business owners, as about a third of start-ups will launch with less than $5,000.
There are no stats to reasonably measure how many business owners don't even bother applying for a small business loan because they know in advance they will be rejected.
However, knowing exactly what you need to get approved can help you set goals to work towards being in the right place after 4 years.
Or, you can start looking at other options right out of the gate.
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