Branching out from the regular 9 – 5 to start your own business is a big step. It comes with some perks too. For one, you have more freedom to manage your personal obligations, and the extra income can be rewarding. But it also has its setbacks.
Besides competition and rapid growth, raising capital to kickstart a business is one of the biggest challenges many startups encounter. The alternative is to seek a loan from a financial institution.
Unfortunately, this option is not guaranteed. Some things can get in the way of your loan approval. In this article, we shall be addressing a few of them and their solutions.
1. You are a startup
It is not fair, we know. After all, there is no crime in starting from scratch. But experience and statistics have shown that more than 80% of startups don’t get to their second anniversary. It is no surprise many banks and lending institutions are adamant about startup loans.
The solution? Source funds from startup financiers. These lenders, who could be venture capitalists or angel investors, specialise in helping budding companies find their feet. However, you must go prepared with a killer pitch.
2. You have a low credit score
Your credit score is a measure of your likelihood to pay back a loan. It is calculated from previous loans, current debts, income, spending lifestyle and more. Many lenders vet credit scores before approving a loan; it is a safety procedure. Unfortunately, poor credit scores don’t encourage bank loans.
Do you have a good credit score? According to Experian, a credit score below 600 is poor. Avoid taking too many loans at a time. Pay off your monthly obligations on time. If your score can’t be helped, seek a lender that doesn’t check credit scores, or only requires a fair score.
3. Your business is not insured
Many businesses pose a liability risk. An uninsured company a potential lawsuit away from bankruptcy. For example, if you run a courier service and need a loan for capital, your business must be insured, or the loan will be denied. Companies need insurance covers against accidents, liability, theft and so on.
The solution for this is simple; get a business insurance policy. The plan you buy will depend on the nature of your business and the exposure rate.
4. You don’t have sufficient collateral
Collateral is a form of “insurance policy” for the lender. It buoys them if you cannot pay back the loan. Since the global economic crisis of 2008 – 2009, when several businesses crashed, and left banks exposed, many banks have become risk-averse.
If you are unable to collateralise a significant chunk of the loan, your application could be disqualified. Some lenders have alternatives to loans, which may or may not be suitable for you. However, you can also consider peer-to-peer lending sites. Many of these lenders provide short-term loans without requesting collateral.
Are you lacking any of these attributes? Consider reviewing them before submitting that application. Good luck!