About three months ago, the US Chamber of Commerce and MetLife released their Small Business Index. This quarterly survey contains self-reported answers from 1,000 small business owners across the US. The first paragraph states that approximately 70% of small business owners “have a positive outlook about their company” and the small business world in general. This is apparently the highest level of small business optimism ever reported in the history of the Small Business Index. One potential explanation for this optimism lies within the next paragraph, which states that 23% of small business owners believe it is difficult to obtain additional financing.
There’s no denying that this is great news for both borrowers and business lenders. But as you read further into the report, it seems that not that not every small business owner has had positive experiences with business financing.
Even though a relatively small amount of business owners believe it is difficult to obtain financing, it’s unclear if that remaining 77% has actually applied for a small business loan or business line of credit. This next statistic suggests that for a significant portion, the answer is no. Out of all the business owners who actively sought financing within the past year, 41% said obtaining access to credit is difficult. Out of all the business owners who have not actively sought financing within the past year, 20% said obtaining access to credit is difficult. So, despite the aforementioned optimism about access to financing, it appears that those who have actually tried to obtain financing are fairly likely to have had a stressful experience, regardless of whether or not they got what they requested.
The report does not explain why these business owners had problems obtaining financing. They might have found the application process tedious, were not approved for their requested amount, or were rejected by multiple business lenders. Another plausible explanation is rooted in the idea that the people who applied for financing probably really needed that financing. The money was likely intended to cover vital expenses in order sustain operations.
Unfortunately, many business lenders (both traditional and non-traditional) still conform to the notion that business loans are usually given to applicants who don’t really need the money. Such applicants are fully capable of covering their desired investment or expenses on their own. Those who need the borrowed funds to do this are much less likely to be approved, at least for their requested amount. It appears that people who are applying for funds following a slow period, sudden emergency, or some other uncontrollable circumstance are still having difficulty being approved.
The Small Business Index uncovered more possibly troubling information concerning the likelihood of being short funded. It’s widely known that the longer a small business has been in operation, the more likely it is to be approved for its entire requested amount. But according to the report, the standards for time in business are absurdly high. Full asking amounts were approved for 75% of businesses that have been open for more than 20 years. As for companies that have been open for less than 10 years, just 51% received their requested amounts. You can only imagine what the percentage would have looked like for businesses that have been open for less than 5 years.
So, unless it has been open for more than 20 years, your business will apparently be viewed as too “risky” to be approved for the full requested amount. This suggests that in the eyes of many business lenders, showing strong cash flow after a decade in business is not enough proof that you can pay off substantial debt.
Companies like United Capital Source can offer solutions for both issues. Most of our clients truly need the money we provide, and if their requested amount is sensible, then that is what they will most likely receive. Heavy capitalization is not a primary requirement for approval at UCS. We work with plenty of businesses that are naturally prone to seasonality or random fluctuations in revenue. They might use our business loans to cover monthly expenses during a temporary rough patch or gap between a sale and compensation. We are even able to approve a number of business funding programs (merchant cash advance, revenue based business loan, working capital loan) for businesses that are currently in their industry’s slow season.
And while banks prefer to work with well-established companies, we frequently approve business loans for businesses that are just six months old. A big reason we love working with young businesses is because debt financing is an essential skill for any business leader. Skills like this should be learned as early as possible. You can start with a smaller amount and eventually borrow much higher amounts for game changing initiatives. If you work with a company like UCS, getting approved for the latter amount shouldn’t be an issue since you will have already proven your capacity to pay off debt.
There’s no denying that access to small business loans has improved dramatically over the years. However, there’s also no denying that smaller, less-capitalized businesses still have a difficult time obtaining higher amounts and advantageous repayment terms. Far too many business lenders will not work with companies that are vulnerable to extreme ebbs and flows in cash flow. Companies like UCS exist to break these unfair perceptions of disadvantaged businesses. We will continue to prove that with the right small business loan, even the most fragile revenue streams can in fact be stabilized.
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