Small Business Struggles: 3 Challenges of First-Time Financing

First-time business owners face unique challenges to funding, including low loan approval rates and lack of business experience. Learn how to overcome these challenges and increase your access to credit.

If you’re a first-time entrepreneur, one of the most significant small business struggles you’ll face is acquiring the funds to start or buy your venture. Since few individuals have enough cash stashed away to cover start-up costs, many rely on financing options to fund their business — from traditional business loans to alternative methods. Unfortunately, even though the economy has improved greatly since the recession back in 2009, loan approval rates at banks are still surprisingly low — leaving as many as 73 percent of small business owners who apply without funding. And for first-time entrepreneurs with no prior business ownership experience, the odds are even lower.

So how can new business owners overcome these funding challenges without having years of experience under their belt? Let’s look at the most common challenges of financing businesses for first-time entrepreneurs and how to prepare yourself to beat the odds.

What are small business funding options?

First, it’s important for business owners to understand the wide variety of financing options available to them. According to Guidant’s 2018 State of Small Business report, the majority of business owners use a mixture of debt-based financing in combination with their own cash or equity financing. The 10 most popular small business funding options are:

1. Cash
2. Friends and Family
3. 401(k) Business Financing
4. Lines of Credit
5. Unsecured Loans
6. Equipment Leasing
7. SBA Loans
8. Peer-to-Peer Loans
9. Home Equity Lines of Credit (HELOCS)
10. Refinancing a Home Mortgage

Cash, money from friends and family are the only three options that don’t carry any prerequisites to qualify for funding. All of the other options have some type of eligibility requirements, ranging from minimum credit scores (usually 650 and above) to down payments to prior business experience. This is the lender’s way of ensuring that borrowers will act responsibly and repay their loans on-time. However, for first-time business owners who don’t have a lengthy credit history or who lack business experience, these criteria can make obtaining funding more difficult. Let’s look at some of the most common reasons why funding is challenging for first-time entrepreneurs.

Learn more about your funding options: Pre-qualify Today.

Challenge #1: Business Loan Approval Rates Remain Low Overall

If you’re like many first-time entrepreneurs, you may believe obtaining business funding is as simple as applying for a business loan from your local bank or credit union. But you’ll be surprised to learn that business loan approval rates at small banks hover around 50 percent and are even lower for credit unions at 40 percent. What’s more – when business loans are offered through local institutions, lending terms are often not as favorable as they could be

However, obtaining a loan from a bigger bank that can offer better loan terms can be even harder. Approval rates for small business loans at big banks are only 27 percent. That means more than three-quarters of all business owners are denied for business financing from larger institutions; and for first-time entrepreneurs, that number is likely even lower.

Challenge #2: First-Time Business Owners Don’t Have Enough Experience

Before approving a small business loan, lenders want to be persuaded that borrowers have what it takes to run a successful business. After all, their ability to make payments depends on how much money their business generates. As a result, lenders will look to see relevant business experience in a potential borrower’s resume. They may even require a copy of their business plan be included in the loan application package to get a feel for how they will run their business (this is especially of loans from the Small Business Administration).

However, for some first-time business owners, they don’t have a long list of business experience that can be used to persuade lenders, and this can hinder their approval odds. Even if they are approved, interest rates may be higher until the bank is satisfied that they will be successful.

Challenge #3: Estimating the Amount of Business Capital Needed Can Be Difficult

Getting approved for business lending is only half the battle for first-time owners. Once you receive the green light from a lender, you’ll also need to determine how much capital you’ll need to start and run your business. According to Jessie Hagen of U.S. Bank, 72 percent of small businesses fail because they don’t have enough capital. Many new entrepreneurs underestimate the amount of capital they’ll need to get their business off the ground in hopes that they’ll be approved for a lesser amount. However, it can be hard to request additional funds at a later date, especially if the business is struggling.

On the other hand, business owners that ask for too much money upfront risk be stuck with a large monthly payment for funds they didn’t need. It’s a delicate balance that requires a lot of thought and research, and for first-timers who don’t have much business experience, it can be difficult to gauge.

How to Solve Business Funding Problems for First-Time Owners

There’s no denying that first-time business owners may have a harder time obtaining financing than those who have been running a successful business for a few years. But there are steps that new entrepreneurs can take to improve their ability to receive funding:

1. Get a mentor. If you’re one of the many who doesn’t have much business experience under their belt, getting an experienced mentor who can provide valuable advice and guidance can be priceless. They can not only help you determine how much funding you should ask for upfront, but they can also support you through your entrepreneurial journey.
2. Become an apprentice. If you’re not under any time constraints to start or buy a business, it may be beneficial to work under another business owner to beef up your resume. Not only will this prove to banks that you’re serious about your endeavor to become a successful entrepreneur, but it can also help you learn important business lessons along the way.
3. Become a more attractive borrower. Any loan carries some risk to lenders, but by taking steps to improve your credit score, you can show banks that you are a responsible borrower and are a good risk to take. By paying your bills on time, reducing your credit utilization ratio and keeping old debt accounts open rather that immediately closing them, you’ll build up a credit score that will put you on favorable terms with lenders. While building credit can take several months, you’ll not only improve your chances of securing funding, but you’ll also receive better rates.
4. Explore alternatives to business loans. While business loans and line of credit are the most popular avenue of financing, a multitude of other options exist to fund a business that don’t require business owners to have a near-perfect credit score or even prior business experience. Among them are Rollovers for Business Start-ups, or 401(k) business financing, which allows you to use existing retirement funds as business capital without incurring early withdrawal tax penalties. As long as you have at least $50,000 in a pre-tax retirement account, you’re eligible to use ROBS.

While financing is the No. 1 challenge for business owners, there are step you can take to set yourself up for success and increase your access to capital by doing your research and surrounding yourself with a team that can guide you.

Guidant Financial is the industry’s leading provider of 401(k) business financing and can help set you and your future small business up for success. Not only can our financing experts guide you through the ROBS process, but we can also help you understand other financing options you may qualify for. To pre-qualify for financing, take our quick funding assessment.