My Business Credit Lines

Why is it difficult for small businesses to obtain working capital loans?

For the last several years it is has been exceptionally difficult for entrepreneurs to obtain bank loans. While the Obama Administration claims they are making efforts to change lending requirements, their results have been slow to improve the lending climate for entrepreneurs.

In a study conducted by Pepperdine University, out of nearly 1,200 applicants more than 60-percent of entrepreneur applications resulted in denial. This study shows a continuing trend. The reason that most small businesses receive denials for cash advances, working capital loans or business lines of credit is because they have minimal collateral. Traditional lending institutions predominantly make their lending decisions based on collateral.

With this considerable debt against borrowers, this means that banks consider nearly 15-percent of small businesses to be non-lendable simply due to their lack of collateral. Another 47-percent of businesses falls into marginal classes based on their collateral status.

The bottom line is that if small businesses are experiencing a financial crisis there is no reason to even bother calling a bank for a loan. Without the necessary collateral to back up a loan, a bank refuses to even bother helping entrepreneurs in need.

Most small businesses ultimately reach out to factoring, which encompasses several different types of loans, such as merchant cash advance loans, private money loans, unsecured loans, etc. Lenders charge higher premiums and interest because small businesses do not have the necessary collateral for traditional bank loans.

Statistics also show that 20-percent of entrepreneurs are able to receive Small Business Administration (SBA) backed loans, while 25-percent are able to obtain unsecured lines of credit, borrow from private lenders or receive merchant cash advances. Another 22-percent of entrepreneurs can obtain factor loans, which are based on the sale of receivables, only these are sold at a substantial discount.

For those entrepreneurs that do qualify for non-bank backed loans, interest rates are high, averaging between 23- to 31-percent. Many of these entrepreneurs have already maxed out their personal savings, family loans, retirement accounts and credit card cash advances.

Most businesses are required to put up collateral for cash, which means their residence, business equipment, company cars, merchandise and much more. The bank then confiscates this collateral, should the borrower fail to pay their obligated payments.

Business owners have several options when looking for additional loans to help infuse their business with cash. The most important advice that business owners can take to heart is to complete the necessary amount of research to explore which loans best meet their companies’ needs.

References:

http://www.entrepreneur.com/article/219768

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