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Why It’s So Tough To Get A Business Expansion Loan

Posted Mar 21, 2018
Loan Denied. Small businesses can have difficult times trying to get qualified for a loan from their bank.

You’re running a successful business, getting into a groove of day-to-day operations when it suddenly becomes abundantly clear – you need cash to keep the growth going! Congratulations!

Maybe it’s for a new point-of-sale solution for check-out, complete with iPads. Or perhaps you need new equipment, a broader marketing campaign, or an expanded inventory. Maybe you want to add a deck or re-do the storefront.   

Now, the big question — where do you get the money for the project?

You likely need to get access to more money than you have in your bank account. And getting a bank loan may not be all that easy.

Just take a look at one piece of legislation that can take a hit at your finances: The Durbin Amendment.

While it was intended to increase economic activity for small businesses and consumers, it actually had the adverse effect overall. Main points of impact for a retailer to know:

  • It lowered the processing expense when debit cards were swiped (45% lower)
  • It raised the effective rate for smaller debit card transactions
  • Banks were saddled with lots of restrictions that limited their ability to make loans

“Before the amendment, many banks and card issuers based transaction fees on a variable percentage of the purchase value, so merchants paid smaller fees on smaller purchases and larger fees on larger purchases. But after the rules took effect, Visa and MasterCard began charging the maximum amount for smaller transactions.”

So now, you want to go back to that very same bank – or maybe a different financial institution – and ask for help. Unfortunately, that help may not be available.

Why Business Expansion Loans Are Scarce Now

First, just like with personal finances, your business credit score could be contributing to your difficulties. Did you even know you had a business credit score? Many merchants don’t.  

According to a 2017 entrepreneur.com survey, some 45% of entrepreneurs didn’t even know they had a business credit score. And 72% didn’t know where to find information about it. You need to start by finding out your business’s FICO score. You can purchase this information through various credit bureaus or a modified, free version through Nav.  Nav.com is a commercial website, but they offer free tools and business credit reports. It may be worth investigating.

According to the same article that cited the study on entrepreneur.com, “The score further rank-orders small businesses by their likelihood of making on-time payments, based on their personal and business credit history, along with other financial data.”

The system uses a scale of 0 to 300. And your business must score 140 to pass the pre-screening criteria of the SBA for its 7(a) loan, its most popular. Interestingly, if you’re denied credit, the lender is not even obligated to tell you why.

The bottom line here: get to know your credit score as soon as possible and build from whatever foundation it gives you.

Other important factors are your cash flow and collateral. Banks need to see consistency with what you’re bringing in each month. They also want to see that you’ve got business assets, in the event that you’re unable to pay back the loans.

If your profit is all over the place or you don’t own the property you operate out of – such is the case with many SMBs – you could have trouble getting a loan.

According to bizjournals.com, banks also like businesses that have low or even no debt with other lenders. They also give you a more favorable rating if you have a diverse set of customers as opposed to generating large revenue from a narrow buyer base.

So, if banks are a tough audience to work with, where can you turn?  

In our next post, we’ll explore alternatives to banks for securing the money you need for your investment project, including cash advances and credit cards.  

No matter what your current plans are for growth, it’s wise to invest time and proper care now to understand your ability to secure funds for your future. It can truly make or break your business.