It’s no big revelation that small businesses make up most of the US economy.
According to the Small Business Administration, small businesses (or companies with fewer than 500 employees) make up 99.9% of all US firms, and nearly half of the private sector economy. Out of all small businesses, 98% have 20 or fewer employees or are sole proprietorships. Because they are vital to our economy and community, small businesses shouldn’t have any challenges accessing credit or capital to keep their doors open. However, less than half of small businesses report that their credit needs are met.
This blog will discuss some of the common roadblocks encountered by small businesses when accessing credit and how to move past them.
Limited cash flow
Cash flow, or a measure of how much cash you have on hand to pay back a loan, is usually one of the first things lenders look at to understand your business’s health and longevity. Insufficient cash flow is something that most lenders won’t look past. For this reason, when you’re considering looking for credit, it should be the first thing on your mind
Business News Daily recommends using this method to determine how much of a loan payment you can afford: Divide your net operating income by your total annual debt to calculate your debt service coverage ratio. You will have a ratio of 1 if your cash flow is equal to your monthly loan payments. Though a ratio of 1 is acceptable, lenders prefer a ratio of 1.35, which demonstrates you have a buffer built into your finances.
Understanding how your cash flow impacts your borrowing ability will make it easier for you to make informed decisions about credit opportunities. If you’re unsure of your financial capacity, meet with a financial planner to create an action plan – a little expert help can go a long way.
Lack of a business plan
While one of the strengths of a small business is its ability to pivot and address changes in the consumer market, frequently, credit providers require a solid and well-thought-out business plan. An excellent way to improve your access to credit is to build yourself a plan.
Here’s a list of things that your plan should include:
- “About Us” – mindset, background as a business owner, and why you’re starting this business
- Historical Overview – any past ventures, business relationships, name changes, and other data
- Products or Services – products or service details, target price points
- Marketing Strategy – target market and customer and how to capture their attention/business
- Financial Summary – the three essential financial statements: a balance sheet, profit and loss statement, and cash flow statement
Once you’ve created your business plan, you’re already better positioned to receive credit.
Poor or insufficient personal and business credit history
If you’re a new business owner, you’re likely to have insufficient business credit history and will need to use your personal credit score to back up any credit requests. Understanding the difference between the two scores is an excellent place to start. You’ll be in a better position to improve your scores. Work on establishing business credit, and you’ll be in a better position to move past those credit roadblocks.
The bottom line
Small businesses are the lifeblood of our country, so supporting them is our priority at Markaaz. After all, 2022 is the year of small business! As a part of our dedication to small businesses, we are working to close those barriers of entry and level the playing field. We’re doing this with our upcoming Dashboard, which gives business owners an at-a-glance view of all their business activity in one place. This includes the features that would give small businesses a better idea of what financing and capital options are available, opening up a world of opportunities.
Learn more about how the Dashboard is changing the game for small businesses, and join Markaaz today!