Most businesses encounter a phase where they need to scale or expand their offerings. Thus, they require sufficient cash to rationalise the goal. Some inject cash reserves into new initiatives and expansion efforts, while some rely on personal financing or investor support to grow. Businesses taking the former route, i.e., financing, encounter struggles.

Some make it through with the first-ever application, and some face rejections. Business loans are the facility that helps entrepreneurs and business owners finance short and long-term needs without waiting for client payments. The criteria to qualify is a little cumbersome because it entails funding up to £2m. Getting such a huge amount for business needs requires a business to meet eligibility standards. It ensures a business’s ability to afford the funds and pay them back in a timely manner.

If a business reveals an unsatisfactory financial situation, unstable revenue, low operating history, etc., it faces challenges to get one. Thus, they delay the business proceedings, and most lose the opportunity. It sometimes proves to be the biggest loss in sensitive business requirements like urgent inventory updates.

Thus, if you face issues like business loan rejections, the blog may help. It lists the common obstacles and solutions to beat them.

5 Common troubles to acquiring bad credit business loans and feasible solutions

Insufficient revenue is one of the most common obstacles to getting a business loan. Lenders usually require good revenue for a business to qualify. Precisely, you should reveal more revenue than you need as a loan. It reveals your potential to pay the dues timely.

Alternatively, businesses exceeding the loan requirement with limited capital or revenue face rejection. Here, you can reveal the existing and new projects to win the lender’s trust. Here are other business loan troubles and solutions to conquer them:

1) Business is too young

You should have at least 3 years of consistent business operating history to get the business loans. It is where the startups and self-employed struggle the most. They lack sufficient operating history to get business loans. It thus leads to rejection.

Solution: If you lack sufficient operating history, provide additional income proof like- upcoming projects, ongoing deals and the last drawn project. Apart from that, reveal your detailed business plan and the efforts to achieve the goals. Sometimes, a business product and credibility help them fetch a loan. You may get the loan if your business plan seems visionary and revenue-oriented.

2) Businesses lacking an asset as collateral

Qualifying for a higher sum, like £2m, requires a business to provide collateral. Most businesses in the early stage lack sufficient assets to put up as collateral. It impacts the loan decision and leads to rejection. 

A business may be required to provide collateral because of incredible finances, no guarantor to provide and insufficient capital to cover the loan amount and interest rates. Work on these aspects. Additionally, getting a secured loan with a low credit history is impossible.

Solution: If you lack collateral to get the loan, check unsecured business loans. You may even get a bad credit history. To qualify, you must have:

  • Stable personal and business credit and finances
  • Should have a detailed profit and loss statement, cash flow statement and business plan
  • Provide a personal guarantee in the form of an asset or a person
  • Provide a clear overview of tax filings
  • Optimise the costs to reduce expenses

If you can ensure this, you can get bad credit business loans without worries.  However, ensure regular payments to prevent your score from falling further.  Adjust your repayment plan if you struggle to pay.

3) Having high debt-to-income ratio

It is a common consideration for both personal and business loans. A high debt-to-income ratio reveals mismanaged finances and debts. It reveals an unclear and indisciplinary stance towards debt management and clearance.  Having a high debt-to-income ratio prevents you from qualifying for a business loan. It is because it makes the lender uncertain of receiving the dues timely.

Solution: You must try to reduce your debt-to-income ratio. You can do so by clearing debts.

For example, if you are already in debt and still invest in heavy machinery and equipment on lease, you may have a high debt-to-income ratio. You can reduce it by paying the existing debt and limiting unnecessary purchases. Debt consolidation is the quickest way to clear debts instantly and improve the ratio.

Additionally, check whether some machinery purchases can wait. You can also  explore ways to increase your revenue before borrowing things on lease.

4) Difficulty in spotting predatory lenders

Businesses falling prey to predatory or unjust lenders face high interest rates, inconsistent terms and interest rates. Initially, they find the offer lucrative to apply and get one. However, later, businesses find themselves wrapped up in a constant debt cycle. It seems impossible to skip this. Moreover, high interest rates, penalties and other costs increase loan costs unreasonably. Not paying the dues leads to constant threats and obstructs mental peace.

Solution: Always check the lender by analysing the reviews, confirming the address, and contacting the lender to find out whether they exist. Additionally, always check the website URL and SSL before entering your details or filling out the form.

Compare the loan costs and fees with other lenders. Leave the table if you find it unrealistic or too good to believe. It may be an ingenuine lender. Alternatively, a genuine lender keeps the terms transparent and answers every query without hesitation. Arm yourself with the best research before applying for a business loan.

5) Lack of financial literacy

It is one of the major reasons startups and self-employed individuals suffer business loan rejection. It obstructs the businesses from understanding the loan terms and making an informed decision. Eventually, making a wrong business decision impacts the events that follow.

Solution: Knowing everything, like- ifs and buts, about business loans helps you understand the possibilities. Moreover, if you lack good credit, it enables you to understand the possibilities of getting a loan affordably. For example, if you begin a business in partnership, you can utilise the credit and financial health of your partner to secure affordable business loans.

Yes, you can do so with joint loans for people needing instant loans for business.  Joint loans help you qualify for a higher sum without paying extra towards the loan. It reduces interest rates and liabilities. Moreover, splitting the responsibility makes it easier to manage.

Bottom line
Overcoming obstacles to gaining bad credit business loans requires patience, strategy and financial knowledge. A business can improve approval chances by focusing on aspects like improving credit score, paying debt, improving revenue gear, and exploring affordable and legal options. Moreover, seeking professional advice can help a borrower make an informed decision.

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