Causes Of Why People Resorts To Credit.​

causes of why people resorts to credit.​

Answer:

1. Lack of consistent cash flow

Banks tend to favor SMBs that have a steady revenue stream and consistent cash flow coming in every month. SMBs that can’t demonstrate this consistency are denied loans significantly more often than not.

2. Insufficient collateral

For SMBs, 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 SMBs.

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 already taken financing. Since many SMB 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.

5. Insufficient credit

In the wake of the recent recession, banks have increased their credit score standards, but many small businesses have credit scores that are still suffering from the aftermath of the financial crisis. In most cases, a business will need a credit score of at least 720 even to get a foot in the door for a bank loan. That’s too high for many SMBs.

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6. 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.

7. 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, a SMB will make likely be rejected for a loan.

8. Economic concerns

No pun intended, but banks are always concerned with their own interests. They simply will not lend money to a business if they feel that the current economic conditions are unfavorable for getting the money back in a timely manner. This puts an unfair burden on SMBs to maintain revenues and keep costs down when the economy takes a bad turn.

9. Insufficient management team

Banks will reject SMBs that don’t have strong top-level leadership with a noticeable chain of command, since that can bring up concerns about the organizational integrity and long-term success of a business.

10. Weakening industry

Operating an SMB in an industry that a bank deems as “weak” or in decline will hinder the chances of receiving financing from a traditional bank.

Consider alternative finance

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