Loans for small business owners: the new catch-22
In the business world, you often have to spend money to make money, which can be tricky if you’re a small business owner filing for a business loan. Your business is obviously in need of money, otherwise you wouldn’t be applying; but before a lender extends a loan to you, they want to see sufficient insurance coverage on all assets you plan to use as collateral.
These premiums can be pretty costly as things start to add up, and ironically enough, can be so costly that it keeps many businesses from getting much needed financial assistance, or passed over all together.
Small businesses with relatively positive cash flow are looked upon favorably by lenders because it indicates a good amount of consistent incoming revenue versus paid out expenses. But business owners often have to take out large loans to finance upcoming initiatives or massive project implementations; these loans are extended on good faith (depending on the company’s financial standing) and proven ability to pay back the loan in order get things going; but when a company has numerous outstanding loans, it dings their credit and can actually prohibit them from qualifying for additional loans or low insurance rates.
The requirement that works against companies
This is a catch-22 for companies struggling with their corporate credit rating; because these companies are seen as a higher risk, more lenders are requiring business loan insurance before they will agree to extend funds to interested parties. But while this requirement helps give the lender some peace of mind, it actually works against the applicant because insurance companies will likely only offer higher rates to these small businesses due to the amount of debt they have outstanding. With both insurance and lending companies viewing businesses with multiple loans as a threat, business applicants’ hands are tied.
This conundrum affects traditional LLCs the most, and may drive these companies to seek alternative sources of funding such as crowdfunding websites. Ultimately, lenders are increasing their loan application requirements to increase the probability of making a sound investment and being paid back.
For small business owners with great cash flow and good credit, business insurance qualifications won’t be a problem to secure at an economical price point; for those with large balances outstanding, it’s going to cost money to get the funding they need to make money – or prohibit them from receiving funding at all.
Tinu
March 6, 2013 at 10:15 pm
Yeah, things like that are exactly why I bootstrapped. Man was it hard. I’m hoping both companies can remain debt-free but even if we can pull it off, it’s at the cost of growth.