Bank of Japan to scale back pandemic-era economic support

Loans from banks for business can make the difference between achieving your goals or not. There are barriers to borrowing from banks that you must overcome before the banks give you that letter of offer. At first glance, it seems illogical why people with bad credit or no credit would be denied bank loans. However, the reason behind this is that banks use other people’s money to give out loans to you. They also need to make profits. They will not invest in someone who cannot repay them. The way you repay your loans has an element on your capacity and the willingness to repay. If you are interested in getting a loan from a bank, this article is for you.

Loans from banks for business: 5 reasons why banks give loans

Banks are always giving out loans to businesses. This is mainly to cover the following uses.

#1. Working Capital: Working capital are funds required by the company to cover day-to-day operations. They include payments for salaries, electricity, transport expenses and training. Without working capital, no company can survive. Usually, working capital facilities are revolving and renewable each year.

#2. Fixed Assets Acquisition: The cost of fixed assets is high and requires large sums of money. Companies go for loans from banks for business requirements to acquire fixed assets. Examples of fixed assets are buildings, machinery, and motor vehicles. Fixed assets loans have a fixed term during which the loan must be repaid in agreed installments.

#3. Refinancing assets: Often business owners use their own funds to build or acquire fixed assets without asking banks for business loans. Companies come back for loans from banks for business requirements refinance assets and repurpose the funds. Banks are happy to consider these loans because the fixed assets can be charged as security.

#4. Loan Restructures: Many times businesses borrow loans and in between they get into trouble and become unable to service their loans. They will then approach the bank to restructure the loan. An example of loan restructure is where working capital loans are converted to term loans. Companies that come for restructuring of loans from banks for business come as last resort.

#5. Marketing Loans: Companies often result in marketing in order to push sales. They may also need to launch new products. These costs are high and may not result in instant results. That is why companies will come for these loans for business growth.

Startup business loans

Do bank loans to startup businesses? Startup companies face many challenges in getting loans from banks for business. Banks have stringent credit analysis models that score companies for loans. Unfortunately, startup companies will not tick all the required boxes to qualify for loans. That is why the governments set up institutions to support them. For example, The U.S. Small Business (SBA)Administration can help small businesses to get loans by setting guidelines for loans and reducing lender risk. Get information on Small Business Loans(SBA). SBA works with selected to give loans that start-ups can benefit from. Examples of SBA-backed lenders are Chase Bank small business loan and Wells Fargo small business loan.

How to get approved for loans from banks for business

Alternatives To Bank Loans

Bank Loans are not the only source of funding. There are other sources of funding too.

#1. Shareholder funding: The first funding source is for shareholders to inject more funds into the business. The shareholders can inject the funds as non-withdrawable capital. They can also inject funds in the form of shareholder loans, payable when the company will have generated enough cash flow to repay.

#2. Equity Funding: the other alternative for the company to avoid business loans from banks is to invite an investor to buy a piece of the company. The new investor will inject money that will be used to run the business. The flip side is that you will give up some control of the company.

#3. Supplier Credit: One of the best sources of funding is using suppliers’ funds for working capital requirements. Supermarkets have mastered this option. They receive suppliers’ goods on credit and sell them on a cash basis. Suppliers are paid by money-paid buyers. Clever huh!

#4. Crowdfunding: There are people out there who are interested in your idea and would be willing to support you. Read more on Crowdfunding.

What are the best banks for business loans?

There is no straight answer to this question. This is because it depends on many factors. If you are an established company with a good credit rating, you will not find it difficult to get flexible loans at low-interest rates. If you are an established company with a bad rating, the reverse will befall you. Startup companies will need to look for solutions from banks designed to take their risk.

If your company’s requirement is for working capital, then you are better off looking for banks that specialize in that field. This is despite the fact that most banks offer working capital and other solutions. It is best that you seek advice from your financial advisor before choosing the best for small businesses.

10 barriers that you face when borrowing from banks

1) Bad Credit or No Credit

It is easier if you have good credit to get a loan, particularly if the bank has established that they regularly pay their other bills on time (e.g., cell phones, utilities). Conduct in other accounts, such as checking accounts & savings account, is important too. If you are applying for a loan and already have an existing loan, the bank will consider your credit score. If your credit is bad, it may be necessary to first take care of some delinquencies before applying again.

2) Low Capacity to Repay

While low income or unemployment may not seem like barriers to borrowing from banks, for people with bad or no credit, these are significant hurdles. Banks are looking for borrowers who have the ability to repay their loans. If you don’t have a job, it will be difficult for you to repay the loan. With this in mind, banks will ensure you have sufficient capacity to repay the loan and also take care of your basics.

3) Lack of Credit History

If you have never borrowed from a bank before, it will be harder for you to do so. If you have demonstrated in the past that you are good at repaying your loans, it follows that you are likely to be able to pay back another one. The bank may choose to start with a small loan to see how you perform. The next loan might be bigger after you establish a good track history.

4) Past Bankruptcy.

If you have declared bankruptcy in the past, it will be difficult to borrow from banks. Bankruptcy will remain in your file for at least 6 years. Few financial institutions may take on such a risk as to lend money to those who have filed for bankruptcy before.

5) Moving Often

People who move often will have difficulty establishing credit with new financial institutions. It is customary for banks to ask you how long you lived in your current residence. How will the bank get you if you default and keep shifting your home ?. Banks want their loans to be repaid to remain in business. This is one reason they ask for your address for the last 10 years. If you have a good reason for your movements, you need to discuss it with the bank. This is not a first-hand rule.

6) High-risk industries

If you work in industries that can be rapidly affected by economic downturns, such as hotels, banks will be less likely to lend money. Banks avoid lending money to clients who operate in industries that are vulnerable to a rapid decline in demand for their services or goods. For example, the demand for air travel has been badly hit during the Covid-19 pandemic.

7) Your Age

Age may also be another barrier when it comes to borrowing from banks. Banks are more likely to lend money to people who are at least 35 years old, especially if they have good credit. If you are too young, you are likely to make financial mistakes such as directing the funds to non-productive assets. If you are about to retire as well, the bank will need to squeeze your repayments in such a way that the loan is repaid before the retirement date.

Other Barriers to borrowing from banks

#8: Don’t lie in the application: You need to be truthful when providing information to the bank in the application process. If you lie, and the bank discovers it before they approve your loan, be sure you will not be getting the money. If you can’t be trusted to tell the truth about how much money you make and what debts and assets you really have, then don’t expect trust from banks.

#9. Submitting Incomplete Documentation: It is essential to go through the bank’s requirements in the application forms. When you submit incomplete documents or even flatly wrong ones, all your efforts to get a loan from the bank will be in vain. Banks only go through the trouble of processing such documents when they are certain that you qualify. Failure to meet submission deadlines and provide complete documents may cost you the loan.

#10. Lack of collateral: Although there are unsecured loans around, most loans are secured by securities. The principle here is that if something went wrong, what is the fallback position for the bank? In other words, banks approve loans with high repayment capacity or low risk. With this in mind, it is difficult to borrow from banks without collateral.

Read about Secured Loans vs Unsecured Loans

In conclusion, banks will be less likely to lend money to people who are either too young, old, or work in high-risk industries. These are examples of things that can act as barriers to borrowing from banks. The list is not exhaustive. However, past bankruptcy and lack of collateral are the most significant hurdles in the bank loan application process.

Although it is challenging to borrow from banks, you should not assume because there are barriers that it will be impossible. You should remember that banks are custodians of other peoples’ funds. They look for the best opportunities to lend money with the lowest risk. We hope that with this information you can now approach banks confidently. If your credit is bad, work on it right away.

Thank you for reading. Please share with friends and family.