You need money to make money. But when a bank loan isn’t an option, you might lean toward high-risk business loans.
First, though, you should figure out why the banks rejected your application and what dangers you face if you end up signing that dotted line with somebody else.
Businesses are finding it harder to get approved for funding. It’s perplexing because there seem to be more alternatives every day.
Still, studies show that when a small business owner needs money, odds are he’ll from his personal savings rather than obtain a loan. One of the primary reasons for rejection is because of the business credit score.
Your business credit score is an indicator of how likely you are to pay back a loan. Several different companies calculate your score, including Equifax, Experian, FICO, and Dun & Bradstreet.
It can take years to build up a good business credit score. Even if you haven’t made any big mistakes, your score may still be low. For instance, if the credit reporting agencies don’t have a record of you paying your vendors and suppliers, then your score will suffer.
The better you understand your small business credit score, the more likely you’ll be able to improve it. And if you improve it, then you’ll increase the likelihood of loan approval.
We recommend speaking with a financial expert to determine the specific ways you can increase your business credit score.
We should note that you can be rejected for other reasons as well:
At the end of the day, the provider wants to be confident that you will be able to pay off your loan. If something makes them think otherwise, then you will not be approved for the funding.
Another thing we should point out is that banks and the Federal Reserve define small businesses differently than the rest of us do. To be considered a small business to the Federal Reserve, you need to have a revenue under $50 million. Banks will sometimes define small business lending as providing funding to companies with revenue under $20 million. But most U.S. small businesses have revenue less than $1 million.
The bigger banks (and that’s most of them) don’t have any interest lending to companies that make less than a million dollars a year. So even if you have a great business credit score and a solid business plan, you might still be rejected by the bank because you’re too small to be worth their time.
The problem with the word “alternative” is that it’s open-ended. An “alternative lender” can be any provider that’s not a bank. It’s an awfully big range. Within that range are reputable companies. There are also the other guys.
The other guys can be downright dangerous. It shouldn’t be too surprising, though – the industry is largely unregulated. So, if you haven’t heard of them, there’s a chance they could be just about anyone doing just about anything.
Here are some warning signs you should look out for:
Even if you deal with a reputable company, there’s still the risk that you won’t be able to pay back the loan. That’s the biggest danger involved with small business lending. It’s what you need to be the most careful about, but all this other stuff is important, too.