Many SMEs and MSMEs in Kenya, and other parts of Africa, find it difficult to obtain credit from financial institutions. This makes it difficult for them to grow or stay afloat. Is your business unable to obtain loans because of this?
Nowadays, it’s almost impossible to keep a small-medium company (SMB), financed from your own pockets. Any expansion, whether it be purchasing inventory, hiring new staff, or opening additional locations requires additional working capital. It’s becoming more difficult for small businesses to obtain funding through banks. Banks are refusing small business loan requests for a variety reasons.
Below are the top 10 reasons we think alternative financing is not possible.
1. Inconsistent cash flow
SMBs with steady income streams and consistent cash flow are more likely to be approved by banks. This is why SMBs who don’t have a consistent income stream and steady cash flow are often denied loans.
2. Insufficient collateral
SMBs are unable to obtain financing if they lack sufficient collateral. Loan applications often include a request for collateral. This is because the loan application must be accompanied by a request for collateral. This is not an issue for large businesses with property or other high-value assets. However, it can prove to be a significant problem for SMBs.
3. Ratio of debt-to-income
Businesses with existing loans from other lenders are not eligible for bank lending. Many banks won’t lend to businesses that have already received financing. SMB owners often seek credit from multiple sources, particularly during the start-up phase. This can make it difficult for them to apply for loans or cash advances from traditional banks.
4. Concentration of customers
Businesses that have a large portion of their sales coming from a small number of customers are often criticized by banks. Lenders prefer diversity to the same customers. Traditional banks may perceive a local restaurant or pub that is reliant on regulars for steady income as a problem.
5. Insufficient credit
Despite banks raising their credit score standards in the wake of the recession, many small businesses still have poor credit scores due to the financial crisis. To get a loan from a bank, a business must have a credit score of at minimum 720. This is too high for many SMBs.
6. Guarantees for individuals
Banks require business owners to provide personal guarantees. However, this also means that the owner is responsible for repaying the loan. This is a difficult situation for anyone trying to keep up with monthly expenses.
7. Insufficient operating history
Businesses with a long and distinguished track record are given preference by banks. Banks won’t finance a business that has been in operation for a while, but hasn’t had a lot of success or credibility. To be eligible for funding, banks require a track record of producing profits over a specified time period. An SMB without a solid operating record will likely be denied a loan.
8. Economic concerns
Banks are always interested in their own interests, no pun intended. If the current economic environment is not favorable for getting the money back on time, banks won’t lend money to businesses. SMBs are forced to keep their revenues up and cut costs when the economy is in decline.
9. Insufficient management team
SMBs without strong leadership and a visible chain of command will be rejected by banks. This can raise concerns about the organization’s integrity and long-term viability.
10. Weakening industry
A bank will not finance an SMB that is operating in a declining industry or in a weak sector.
Consider alternative financing
What should you do if a bank denies your request for a loan? Alternative funding is one of the best options. Alternative funding is available from non-bank entities who specialize in lending funds small- and mid-sized businesses. There are many options that lenders can offer to owners looking for capital to grow their businesses. These are just a few options.
Merchant cash advances
A business cash advance program provides capital to purchase a fixed amount of future credit/debit cards sales. MCAs are not fixed monthly payments. They work with your natural cash flow and automatically subtract a small portion from your credit/debit cards sales until the cash advance is fully repaid.
These loans are non-traditional and can be used to finance small businesses. The industry has a variety of loans. A mom-and-pop business may require $5000, while a fast-growing company might need $500,000.
Stock purchase programs
This program is designed to assist small businesses with inventory, one of the most important and fundamental expenses. Merchants can buy inventory with this innovative inventory financing program at no upfront cost. An alternative lender will finance 100 percent.
Family and friends
While it’s not considered alternative financing in the traditional sense, borrowing money from family and friends can be a great way to help business owners get additional working capital. This could be the best option as it involves people who are close to the owners and have strong personal relationships.
This is a caveat: Money and personal relationships can’t always mix. It’s important that everyone involved communicates clear about payment terms and expectations before things get complicated.
Personal and business credit cards
To get the funds owners need, they have the option to buy now and pay later using their personal or business credit cards. This could have a significant impact on credit scores and limit, and although it is an immediate fix, it can also be one of the more risky options.
The first three alternatives to lending are safer than friends/family or credit cards. Proven entities will work with your business and have a track record of helping them achieve their goals.
Mainstream businesses are now accepting alternative funding as a viable option. Alternative lenders are becoming more popular and getting backed by the largest companies around the globe. This has led to a record number of SMB loans. The support of alternative lenders has had a significant impact on the nation’s economy. Small business sentiment in America is now higher than ever before the financial crisis.