The average small business owner struggles to get funding from traditional owners of capital. It can even be harder for minority business owners. Some lack proper identification documents and Social Security Number (SSN), making it even harder to obtain loans.
It's not all doom and gloom for minority business owners, though. Recently, some lenders have started offering ITIN loans to minority entrepreneurs without SSN. For instance, you can get an ITIN loan with Camino Financial. But before you jump, you need to take some steps to tilt the odds of approval to your favors.
Common reasons people get a 'no' from lenders
Understanding why most borrowers face rejection from lenders can help you know what to do and prepare before asking for a loan. Top reasons include:
1-. Poor credit or no credit
Lenders use your personal or business credit score to determine your responsibility towards debt repayment. If you have a poor credit score or no credit history, most financial institutions will label you a "high risk" borrower and refuse to lend to you.
2-. Short trading history
Most lenders refuse to offer small business loans to startups because they have a high chance of sinking with their money. For instance, most lenders turn away business owners who have been into business for less than three years.
3-. Inadequate cash flow
Lenders analyze your business's financial records to determine its current financial standing. If they find out that your business is struggling financially, they're less likely to put money into it.
4-. Gender bias
Gender bias is a bane in traditional banking institutions. It's the main reason why women entrepreneurs seeking startup and growth capital from conventional capital owners receive a "NO."
One study shows that women are 15%-20% less likely to get approved for a bank loan compared to men. In the end, they end up receiving less than 16% of all traditional loans.
5-. Systemic racism
Systemic racism is the reason why most immigrants struggle to obtain small business financing from traditional lenders. For instance, a white entrepreneur applying for a business loan of over $100,000 is 50% more likely to get approved vs. 20% for a Latino business owner.
6-.Lack of collateral
Most lenders require collateral or personal guarantees before they advance loans to borrowers. Since most startups lack valuable business assets to secure funding, they end up facing rejection.
Best practices to do before asking for a business loan
-Check and improve your credit score
Check your credit score and take steps to improve it before asking for a business loan. It'll not only increase your chances of getting approved, but you'll also stand a chance to qualify for low-interest rates and reduce your cost of borrowing.
Get a secured credit card, keep your credit utilization low, and pay bills on time to improve your credit score. Again, make sure you dispute any errors on your credit report.
-Choose your lender
After you've nailed your credit score, the next step is to research lenders based on their minimum credit requirements. Once you have many lenders who are willing to work with your credit profile, sift them based on their interest rates, ease of application, payment schedule, approval periods, and other fees.
Online lenders offer a simple pre-approval process to help you know where you stand before the actual application. If a lender doesn't provide what you need, look elsewhere.
-Determine your costs
Before asking for a loan, use a business loan calculator on your lender's website to determine your monthly repayments and total interest rate. That helps you know your total loan cost and figure out whether you'll be able to repay comfortably.
-Gather your business documents
You'll need to present your identification documents, business permits, and license to show that you operate a legal business entity. Lenders will also need your financial statements and tax returns to determine your business's current financial standing.
ITIN loans for minority entrepreneurs
Some minority entrepreneurs lack proper identification documents and Social Security Number (SSN). Even with the above best practices, they may still stand no chance of getting small business loans from traditional lenders. To help them out, some fintech lenders offer ITIN loans. These are particular types of business loans meant for minority business owners without Social Security Number (SSN).
So far, Camino Financial is the only lender that offers ITIN loans to Latino business owners. They even welcome small business owners with poor credit or no credit. Visit the link in the intro to learn more about ITIN loans.