Top Hurdles SMEs Face When Applying For Business Loans

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Today, many small businesses face a common challenge: our traditional banking system often denies business loans that they need to level-up their growth. As of 2019, only 29% of small businesses’ loan applications were accepted by major banks and only 48.9% by smaller banks. 

Given this high rate of loan denial, small businesses consistently name “lack of funding” as one of the top barriers they face in growing their business. No wonder that only about half of new businesses make it to the fifth year. 

In this article, we will consider some of the main hurdles small and medium businesses (SMBs) face when requesting for loans from traditional banks. 

At the end of the article, we will also introduce an alternative small business loan option that your SMB can explore to get the funds you need to thrive and grow. 

Outdated credit score system

Most banks in the US use the FICO system to measure the creditworthiness of a loan applicant, and, thus, the likelihood that they will repay. This system awards credit scores based on past credit activities of the individual or business applying for the loan. 

Those with higher scores have a better credit history and are more likely to access credit than those with lower scores. 

While failure to repay loans when due will lead to a poor credit score, absence or few past credit activities also makes a business a high-risk customer in the eyes of banks. And with many small businesses bootstrapping their way into existence or relying on personal grants or loans from family and friends, they often don’t have a large credit history that will give them the high credit score they need to access loan facilities from banks. 

In essence, SMBs need credit history to access credit but they can only have a credit history by accessing credit. Said simply, with this system, SMBs are stuck.  

High collateral demand

Banks try to compensate for the lack of credit history by demanding high amounts of collateral (such as assets or properties). But SMBs either don’t have many high-valued collaterals or the ones they have are personal assets, such as their homes, which they are, wisely, unwilling to put down as a collateral. 

Put simply, SMBs need bank loans to invest in their business and purchase the assets they need to grow, but they need to have these assets before they can access the bank loan. Again, SMBs are stuck. 

High interest rates

There is another potential loan offer from banks: unsecured loans. 

These loans don’t require collateral but they are often smaller amounts with high interest rates (compared to secured loans). 

These unsecured loans require that SMBs settle for amounts that often cannot help them in any significant way, all while paying exorbitant interest rates. Moreover, many of them will still require a good credit score, which SMBs usually don’t have due to lack of credit history. 

Financial documentation 

Banks, more often than not, will also ask for a few years of well-kept financial documents that show the financial stability and profitability of SMBs. However, only a small percentage of SMBs can hire a professional accountant that will adhere to the standards of financial documentation that many banks require.  

Does this then mean that SMBs are forever stuck in cash flow difficulties and inertia?

Overcoming the current hurdles of getting a small business loan

Duck Fund has been working to transform SMB financing by removing these hurdles. 

First, Duck Fund uses a more sophisticated system to evaluate the creditworthiness of SMBs. This system uses AI-based business analytics tools to collect business and financial information about SMBs and evaluate their potential more comprehensively. 

Second, it evaluates a business as a player in a larger supply chain. That is, it tries to gain more visibility into a business’s flow of capital and its connection to the larger businesses in the supply chain. 

Based on these two evaluations, Duck Fund creates a unique credit scoring model that better reflects the true potential of a business. 

Due to this unique scoring model, Duck Fund can offer personalized funding options without a demand for collateral, standardized financial documents that require professional accountants, or high interest rates. 

Consequently, as a small business, you can get the funds you need in a timely, personalized, and cost-effective manner without passing through the hurdles that traditional banks will place before you. 

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