You aren’t alone.
Are you grappling with the many challenges that accompany the business capital funding process?
While capital funding issues often trace back to lenders, we can’t place the blame entirely on their shoulders. The reality is that many small business owners hinder their progress in this regard—although lenders have their own sets of issues as well. Both need to work on their processes, systems, and comprehension before they can resolve them.
Thousands of small business owners face problems and obstacles when trying to finance their businesses. Securing adequate capital funding is one of modern entrepreneurs’ top concerns as a result.
The Paycheck Protection Program, also simply known as the PPP, has served to highlight some major challenges for lenders that work with small business owners. Lenders and borrowers alike face numerous obstacles that they need to overcome to ensure a successful interaction all around.
Here are some of the most common business capital funding issues for companies and how you can address them.
1. A Shortage of Cash on Hand
According to leading financial experts at JP Morgan-Chase, the average small business in the U.S. usually only has enough cash on hand to see it through 27 days of operation. That doesn’t even constitute a complete billing cycle!
This concerning lack of capital reserve makes it essential for these businesses to have access to borrowed capital, especially during tough economic periods. Without sufficient capital readily available, a company will find it significantly harder to weather other common challenges like unforeseen expenses. 35% of small businesses cite these expenses as their primary financial issue, so they are clearly an overarching issue.
During COVID-19, it’s recommended that small businesses have at least half of their expected revenues for the next 6 months on hand to withstand the current choppy financial waters. Naturally, this is a hefty request for many companies, but without all-important access to business financing, most businesses simply won’t survive on 27 days’ revenues. Any potential for growth would not survive under the pressure of this shortage of readily available cash.
2. Poor Personal and Business Credit Scores
Many businesses have been unable to obtain PPP funding because of major issues with their books. There are far too many entrepreneurs with personal and professional financial records that make it all but impossible for them to secure access to the capital they need.
According to Nav’s Small Business American Dream Gap Report (2015), 20% of business owners who applied for funding over the 5 years prior did not receive the approval they expected. Even worse, 82% of those applicants were unable to accurately interpret their own credit scores. It’s easy to tell from this data that it’s crucial for businesses to identify and improve their credit scores for a number of key reasons. Before you apply for financing, you need to have a solid idea of how you will use any extra capital, and which funding options will suit your business’s needs best.
If you’re the owner of a small business and your finances show cash and revenues as close to nil as possible to avoid tax, that makes it difficult for lenders to make concise decisions about your company’s ability to address its debts. Potential lenders will want to see revenues that clearly show your ability to make regular, full payments. If your books don’t reflect this evidence, lenders will most likely deny your loan. The Nav study confirmed that individuals who have a proper understanding of their business credit scores are 41% more likely to receive the loans they apply for.
A good way to address the credit challenge is to have roughly 5 times the cash flow that you will need to make monthly debt service payments reflecting. Your lender will carefully consider whether your company will be able to make each periodic payment in a timely manner. They simply won’t give your application their stamp of approval if your financial statements give them any reason to doubt you.
3. A Lack of Technological Literacy
Technological issues have been notably prevalent in the way that the SBA dealt with PPP applications. The SBA has certainly processed more loan applications over the past months than they would normally deal with in a number of years, and the increased pressure has pinpointed the cracks in their system. Their technological infrastructure has not been able to handle the rapid wave of applications, creating troublesome bottlenecks and delays for all involved.
There are too many mainstay financial institutions, including the SBA, that are working with outdated, dysfunctional computer systems. These systems cannot handle the demand of an economic crisis like the one brought about by the coronavirus pandemic. Moreover, there are too many bureaucrats and finance experts that don’t have a solid understanding of how Fintech companies operate, nor do they grasp why the technology they used to handle the loan process would be advantageous for small businesses. While many may not have this understanding, they certainly should.
Addressing the Challenges
Business owners and the financial institutions that service them need to work together to solve these pervasive business capital funding challenges.
Borrowing businesses need to streamline their financial processes and improve their handle on their finances. They need to gain a better understanding of how their business credit scores will affect their ability to borrow sufficient capital. They also need to become familiar with the business criteria that lenders look at when evaluating companies’ ability to service their debts.
You need to address these aspects of your business in order to obtain capital, whether you are operating as a sole proprietor or you have dozens of staff members on board. Entrepreneurs that take this on board will have no trouble accessing the capital they need—but those that fail to do so will continue to tread water.
Financial service providers need to make some strategic adjustments too. It may not be easy or inexpensive to rebuild legacy systems that adequately serviced demand a decade ago, but it is necessary. The small business financial industry is significantly more dynamic today than it was back then, and institutions that adjust their technological infrastructure accordingly will be more ready to meet the needs of their clients.
Institutions that wish to improve their systems can choose from one of three main options.
1. They can create and update their systems themselves by investing in their ability to manage their technical financial platforms from within their ranks.
2. They can buy the technology from another provider and integrate it with their current system.
3. They can team up with a Fintech service provider who can streamline and improve their current system to create a better customer experience and more efficient processes overall.
As is evident, there are multiple options, but executing any one of them takes time. In the current economic climate, time is not something that struggling businesses who require funding have on their side.
The PPP saga has clearly demonstrated that the way business owners are currently accessing capital is just not sustainable for the foreseeable future.
This logic applies to both financial service providers and entrepreneurs. Every party involved needs to work together to solve the pressing business capital funding challenges that small businesses are facing today.