Why Do Most Business Owners Struggle To Get Bank Financing?

Why Do Most Business Owners Struggle To Get Bank Financing?

Disappointed Business Owner

Huntington Beach, CA: According to Bloomberg, 80 percent of small businesses fail within the first 18 months. Some fail because their products do not fit current market needs, others because they do not adequately differentiate themselves from established competitors, and others because they do not effectively communicate value propositions to consumers. Of course, startups would in many cases be able to fix those problems, if only they had time.

The Increasing Difficulty of Securing Funding

Although business owners have access to a wider variety of financing options than ever before, finding capital is becoming increasingly difficult. Referencing a survey of small business owners–The Small Business American Dream Gap Report–Levi King (CEO of Nav), writes in Entrepreneur:

“Within the previous year, the survey revealed, 20 percent of the small businesses surveyed said they had considered shutting down, primarily because of lack of growth or cash-flow issues.”

Why Businesses Have Difficulty Obtaining Bank Loans

Banks fail to approve small business loans for a variety of reasons, including the following:

  • Poor credit history: the personal credit threshold for many business loan products is around 660; banks typically have a higher score threshold of around 720. Traditional banks and some privately-owned finance companies have a preliminary scoring system based on running a credit check on the individual’s credit first. This is the first hurdle in getting approved for a loan. Poor personal credit most often stops the review process before any real underwriting has taken place on the business.
  • Time in business: the magic number for time in business is 2 years. Why is this? Because most businesses fail within this time period. Not only is time in business important, but also profitability. It is not good enough to simply be in business for two years. Banks look to see at least two consecutive years of profitability on the business tax returns. Business tax returns are the most conservative numbers for the business (because of the natural tendency to keep profits down to avoid paying taxes), and thus, are the numbers used when applying for a bank loan.
  • Historical Debt Coverage: banks frequently fail to approve loans because business owners do not have the necessary debt service coverage for the loan when they apply. Banks look back in time when determining whether or not the business can afford the debt. This in contrast to looking at projections and possible increase in profitability as a result of using the funds provided from the loan to grow the business.

Are There Any Financing Options Other Than Banks?

Fortunately, there are forward-leaning companies that help businesses secure financing. These groups are private funding companies providing asset based loans and working capital products with fewer restrictions and qualification hurdles to jump through. These companies are the cavalry to the rescue for many business owners. Without the second tier, private money programs in the marketplace, many more business owners would have to close up shop. Connecting business owners with this second tier market is what Huntington Coast Capital was formed to do. We are on the side of business owners and help them navigate the secondary markets when the banks say, NO!

Conclusion

Companies like Huntington Coast Capital succeed for 3 principal reasons:

  • We are unbiased in providing business loan options and comparisons;
  • We serve a broad range of industries; and
  • We specialize in securing loans for businesses that have been turned down by the bank.

If you’ve been turned down for a bank loan and want to learn more about our innovative financing options, contact us today.

Sources:

Entrepreneur: Five Reasons 8 Out Of 10 Businesses Fail

Entrepreneur: The Real Reason Banks Deny Loans to Many Small-Business Owners

Nav: Nav’s Small Business American Dream Gap Report Reveals Surprising Reason Many Loan Applicants Get Denied

Business News Daily: 6 Factors That Keep You from Getting a Small Business Loan

Huntington Coast Capital: Why Us?

How Will A Rise In Interest Rates Effect Business Owners?

How Will A Rise In Interest Rates Effect Business Owners?

Things That Traditionally Increase When the Fed Increases Interest Rates

The recent rise in the Fed funds rate will likely cause a ripple effect on the borrowing costs for consumers and businesses that want to access credit based on the U.S. dollar. That has an impact across numerous credit categories, including the following:

  • The Prime Rate: A hike in the Feds rate immediately fueled a jump in the prime rate, which represents the credit rate that banks extend to their most credit-worthy customers. This rate is the one on which other forms of consumer credit are based, as a higher prime rate means that banks will increase fixed, and variable-rate borrowing costs when assessing risk on less credit-worthy companies and consumers.
  • Credit Card Rates: Working off the prime rate, banks will determine how credit-worthy other individuals are based on their risk profile. Rates will be affected for credit cards and other loans as both require extensive risk-profiling of consumers seeking credit to make purchases. Short-term borrowing will have higher rates than those considered long-term.
  • Savings: Money market and credit-deposit (CD) rates increase due to the tick up of the prime rate. In theory, that should boost savings among consumers and businesses as they can generate a higher return on their savings. However, it is possible that anyone with a debt burden would seek to pay off their financial obligations to offset higher variable rates tied to credit cards, home loans, or other debt instruments.
  • U.S. National Debt: A hike in interest rates boosts the borrowing costs for the U.S. government and fuel an increase in the national debt. A report from 2015 by the Congressional Budget Office and Dean Baker, a director at the Center for Economic and Policy Research in Washington, estimates that the U.S. government may end up paying $2.9 trillion more over the next decade due to increases in the interest rate, than it would have if the rates had stayed near zero.

Things That Are Largely Unaffected When the Fed Increases Benchmark Interest Rates

  • Auto Loan Rates: Auto companies have benefited immensely from the Fed’s zero-interest-rate policy, but rising benchmark rates will have an incremental impact. Surprisingly, auto loans have not shifted much since the Federal Reserve’s announcement because they are long-term loans.
  • Mortgage Rates: A sign of a rate hike can send home borrowers rushing to close on a deal for a fixed loan rate on a new home. However, mortgage rates traditionally fluctuate more in tandem with the yield of domestic 10-year Treasury notes, which are largely affected by inflation rates.

Things That Traditionally Decrease When the Fed Increases Interest Rates

  • Business Profits: When interest rates rise, that’s typically good news for the profitability of the banking sector, as noted by investment giant Goldman Sachs. But for the rest of the global business sector, a rate hike carves into profitability. That’s because the cost of capital required to expand goes higher. That could be terrible news for a market that is currently in an earnings recession.
  • Home Sales: Higher interest rates and higher inflation typically cool demand in the housing sector. On a 30-year loan at 4.0%, home buyers can currently anticipate at least 60% in interest payments over the duration of their investment. Any uptick is surely a deterrent to acquiring the long-term investment former President George Bush once described as central to “The American Dream.”
  • Consumer Spending: A rise in borrowing costs traditionally weighs on consumer spending. Both higher credit card rates and higher savings rates due to better bank rates provide fuel a downturn in consumer impulse purchasing. (For more, read How Interest Rates Affect Spending.)

HCC Funds $1,300,000 In Business Loans In The Month Of December

HCC Funds $1,300,000 In Business Loans In The Month Of December

Huntington Beach, CA.  During the month of December Huntington Coast Capital secured a $650,000 equipment loan and two SBA loans for $500,000 and $150,000 for a total of $1,300,000 in business loans! The scenarios are outlined below:

  1. $650,000 equipment loan for a southern California contractor – The company was paying a high rate of interest on the equipment they used in their day to day operations – The high cost of financing was impacting their cash flow. They engaged Huntington Coast Capital for their equipment loan needs and we were able to reduce their financing costs by almost half, saving them thousands in monthly finance expense.
  2. $500,000 SBA loan for a growing company in the stencil business – The company produces custom stencils for any design and application. The company had an existing SBA loan and were looking to borrow an additional $350,000 to purchase additional equipment to meet growth demands. Huntington Coast Capital secured a $500,000 SBA loan to cover the equipment costs and refinance the existing SBA loan.
  3. $150,000 SBA Express Loan for a custom glass manufacturer – An established custom glass manufacturer was looking for additional funds for advertising and marketing to break in to new markets and broaden their customer base. They have a profitable business serving general contractors and are looking to expand in to direct commercial work.

Whether your business loan needs are for equipment purchases, inventory or general working capital demands, we can assist. We serve companies of all sizes from startup to established.

Business Loans and Satisfied Clients

Business Loans and Satisfied Clients

Huntington Coast Capital has specialized in securing business loans, equipment loans, inventory loans, SBA loans and purchase order financing in California for business owners since 2011. We are good at what we do, but do not take our word for it, listen to our clients! We secured a $6,500,000 line of credit for Penguin Foods that reduced their cost of funds and allowed them to grow their business well in to the future. Click the image for the video testimonial:

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