Securing any kind of legitimate loan always includes jumping through a few hoops. For small business owners, those hoops can be numerous and difficult to navigate.
The fact of the matter is that getting a small business loan for equipment can sometimes be quite hard. It can be common for entrepreneurs not to get the financing they want, at least not right away.
Fortunately, small businesses don’t have to rely solely on the traditional methods of securing equipment financing. With some research and preparation, you may very well find exactly what you need to keep offering goods and services to your customers.
In this article, we’ll delve into some of the more common struggles small business owners encounter when seeking financing for equipment and upgrades. Then we’ll present solutions that pull from resources other than banks and other traditional lenders.
Why Is It Hard to Get a Small Business Loan From a Bank?
If you try to get a loan from a bank for equipment for your business, you can expect to face a range of hurdles. And this usually happens without anyone stepping back to view the full picture of your business.
Anyone who’s ever tried to get a loan is familiar with the irony: You need one because you don’t have enough money, but you must have a certain amount of money to get the loan. However, it’s not only about how much money you have for business owners, but also how long you’ve been bringing it in, where it comes from, and the details on how you plan to use it. Even personal credit history can come into play.
Let’s look at the major reasons entrepreneurs struggle to lock down financing for equipment from some small business lenders.
Unfavorable Credit History
Lenders will likely inspect your personal and business credit. They’ll look at your payment history and current business credit score, the latter generally needing to be at least 680 (though being above 700 is far more ideal). A score that’s too low (“bad credit”), or not having enough credit history to predict future loan repayment, will make it very difficult to get a small business loan for the equipment you need.
Too Much Debt
If you carry too much debt or bring in too little money to effectively reduce debt, it limits your chances of a small business loan. This is especially true for younger businesses, which often spend a lot up front to get started and aren’t making a steady profit just yet.
Too Little Cash Flow or Collateral
The flipside to too much debt is too little income. Sometimes, business owners with less-than-ideal credit or revenue might back the loan with collateral. Collateral is something the business owns that may get sold off if the owner defaults on a loan. The collateral could be real estate, equipment, or other assets. If business collateral isn’t available, borrowers may resort to using personal collateral, putting their home or other necessities at risk.
Insufficient Business Plan
In addition to wanting to know what you want money for, lenders may expect a detailed business plan. A solid business plan will outline your goals and how you plan to reach them. This includes explaining why each piece of equipment you’re trying to finance is vital to your business.
Minimal Investment by Business Owner
If a small business owner hasn’t used any of their own money to fund business needs, it might be a red flag to lenders that you’re too reliant on outside sources. Putting up your own money demonstrates passion and commitment, which are favorable traits in a borrower.
If business collateral isn’t available, borrowers may resort to using personal collateral, putting their home or other necessities at risk.
Too Many Loan Applications
Applying for multiple business loans at once or already having several lined up is another potential red flag for lenders. Akin to not investing in the business yourself, it suggests a lack of planning and resources. If many of your loan applications have previously been rejected it will impact your ability to secure a new loan.
Lack of Organization and Research
Doing your homework is a sign of commitment that goes beyond passion. If you haven’t gathered the proper documents, organized your application process, or researched the best kinds of loans for small businesses needing equipment, the bank may question whether you’re ready to manage a loan.
Not Working With Experts
Running a business is hard, and simply wanting to do it does not mean a small business owner will do it well. Including work with mentors, financial advisors, and marketers in your business plan shows resourcefulness and an openness to collaboration.
Pursuing the Wrong Kinds of Loans
Not all small business loans (sometimes called SBA loans if they involve the Small Business Administration) are right for all small business needs. In terms of financing equipment, it’s important to explore loans designed specifically for this kind of purchase. Going after an SBA loan that doesn’t suit your goals can waste everyone’s time and reveal that you haven’t done your research. Similarly, shopping around for the right lender shows you’re being responsible.
Not Being in Business Long Enough
The younger a business, the more likely it is to carry debt and bring in minimal revenue. It also means less experience and less evidence of success. While being young is not “bad” on its own, combined with other business loan approval factors it could reduce your chances of securing a loan.
Not Actually Being a Small Business
Every industry has its own definition of what qualifies as a small business. If you are too large, in the non-profit space, or professionally involved with, for example, gambling or religious activities, lenders won’t see you as an eligible small business.
RELATED: 20 Questions: Here’s How Equipment Financing Works
Other Ways to Get a Business Loan Do Exist
Did you know that big banks approve fewer than 20% of small business loan applications? That’s some serious competition, especially for one that is just getting started.
Fortunately, banks are not your only option. In recent years, increasing numbers of small businesses have started seeking alternative lending options online. Since they aren’t constricted with the same rigid parameters, online lenders have greater flexibility that may work quite well for small businesses in need of equipment.
There are some downsides to going through an online lender, though. These financers rarely foster relationships with clients. When you want to work with someone who truly understands your unique business, that is a problem. And even though traditional lending institutions tend to be rigid and inflexible, at least you can still walk into a branch and speak face-to-face with a loan officer.
Work With a Private Commercial Financing Company That Prioritizes Relationships
At Team Financial Group, we strive to provide the best of both worlds. We look at the bigger picture of your small business and get creative with financing solutions to help you get the equipment you need. Further, we treat our clients as partners, working together to achieve your short-term and long-term goals.
For example, the seasonal nature of American Apples’ business gives them an unusual cash flow pattern. While that might be a problem for a bank, Team Financial Group created a customized financing agreement that works for their business model. And now the relationship that began with us financing apple boxes continues as we help American Apples with all their equipment financing needs.
RELATED: What Is an Equipment Financing Agreement (EFA)?
We look at the bigger picture of your small business and get creative with financing solutions to help you get the equipment you need. Further, we treat our clients as partners, working together to achieve your short-term and long-term goals.
Team Financial Group: Providing Small Business Loans for More Than 20 Years
Team Financial Group is proud to provide equipment financing to small businesses for more than two decades now. And we’re pleased to offer same-day, flexible, loans, leasing, and other financing agreements so businesses can get what they need to thrive.
We work within a range of industries and cash flow patterns, including construction, manufacturing, energy, technology, agriculture, transportation, office equipment, and more. We also partner with equipment vendors to help expand their financing options.
Educating borrowers on loan types and the business loan application process is a big part of what we do. For example, we can help you understand the difference between $1 buyouts versus FMV leases. And if you ever have any questions related to equipment financing, please don’t hesitate to reach out and ask.
If you’d like to learn more about us or are ready to apply, feel free to browse our site and get in touch. We’d love to help your small business find success through an amazing financing relationship!
Johnson, S. (2022, August 30). 8 factors that keep you from getting a small business loan. Business News Daily. Retrieved from https://www.businessnewsdaily.com/6242-small-business-loan-mistakes-to-avoid.html
Martins, A. (2022, August 30). How to get a bank loan for your small business. Business News Daily. Retrieved from https://www.businessnewsdaily.com/15750-get-business-loan-from-bank.html
Nicastro, S. (2022, June 30). Business loan requirements: 7 things you’ll need to qualify. Nerdwallet. Retrieved from https://www.nerdwallet.com/article/small-business/how-to-qualify-for-small-business-loans
Ward, S. (2020, October 11). Challenges of getting a small business loan. The Balance Small Business. Retrieved from https://www.thebalancesmb.com/small-business-loan-2947070
The content provided here is for informational purposes only. For financial advice, please contact our commercial financing experts.