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Why do banks and financial institutions find it hard to meet SMEs funding requests? Most challenges faced by small businesses revolve around sufficient cash flow to run the business. It’s nearly impossible these days to keep a small business running with money drawn from your own pocket. Whether it’s purchasing inventory, hiring new employees, or opening additional locations, any type of expansion requires extra working capital.
Finding this capital is becoming harder for a significant proportion of small businesses despite the wider variety of financing options available.
We’ve written down some top reasons why you are not able to access bank funds, you don’t want to miss out on No. 7.
1. Inconsistent Cash Flow
Most SME owners are excellent hustlers. They can get monies from several quick businesses outside their core operations. Unfortunately, banks and financial institutions don’t consider such because you can’t plan with such irregular sources of income. Banks tend to favor SMEs that have a steady revenue stream and consistent cash flow coming in every month. SMEs that can’t demonstrate this consistency are denied loans significantly more often than not.
2. Insufficient Collateral
For SMEs, lack of sufficient collateral excludes them from obtaining financing because loan applications usually include a request for a viable piece of collateral in order to complete the transaction and receive funding. That’s not a problem for large businesses that own property or other big ticket assets, but it can be an insurmountable hurdle for SMEs especially if their books are not well kept. There are online ERPs that can help with book keeping and accounting. An example that comes to mind easily is SMERP.
3. Debt-to-Income Ratio
Banks are wary of lending to businesses that have existing debt with other lenders. In many cases, they won’t even consider lending to a business that has facility with other banks or financial institutions. Since many SME owners seek credit from multiple sources, especially during the start-up phase, this can be a major strike against them when applying for a loan or cash advance from a traditional bank.
4. Customer Concentrations
Banks are often skeptical of businesses that report a significant bulk of their sales from only a select number of customers. Lenders, in general, like to see diversity in a business’s clientele as opposed to the same customers. For example, a local pub or restaurant that relies mainly on its “regulars” for steady income can present a perception problem with traditional banks. An Agri-business company whose major customer is two big supermarkets will raise red flags. A cleaning company whose only client is a popular hotel raises red flags.
5. Personal Guarantees
Personal guarantees from business owners are requirements from banks, but that also makes the owner personally responsible for paying back the loan. That’s a precarious position for those struggling to stay on top of expenses every month.
6. Insufficient Operating History
Banks give preferential treatment to businesses with lengthy and significant track records. After all, they don’t want to fund a business that has been operating for a while, but hasn’t sustained a certain amount of success and credibility. Banks demand a solid track record of generating profits over a specific time period in order to receive funding. Without that solid operating history, an SME will make likely be rejected for a loan. You can only achieve this when you keep your books.
7. Read Through #1 – #6 Again
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Adapted from SMEDigest http://smedigest.com.ng/why-you-not-getting-funds-for-your-business.html