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Reduced Capital Threatens Business’s Livelihood

Businessman increasing bar graph
Few businesses can expand without sufficient capital, which makes business lenders’ willingness to lend more important in this strengthening economy.

In honor of Small Business Week, which runs from June 17 to June 21, loans.org interviewed several experts on the impact of business loans on new or existing organizations.

A recent report by nonprofit microlender, Accion Texas, found that businesses without funding face more negative results in the future. According to the study, startups that receive business loans increased their survival likelihood by 44 percent.

Even though the business loans were small, with an average of $16,000, the report found that the impact was “enormous.”

Increasing funding not only decreased a business’s chance of failure, but it also improved the business as a whole.

“Receiving a loan has a positive and significant effect on revenue growth rate, revenue levels and the number of employees of startups,” the report said. “Providing early-stage loans to entrepreneurial firms significantly enhances their future economic performance across several important dimensions.”

Jessica Oman, owner and chief strategist for Write Ahead, a firm that writes business plans for startup companies, said that she has seen many business owners underfund their companies. Some wind up with “disastrous” results. 

“Many business owners close up shop because they are underfunded, and they can’t afford to bankroll their businesses any longer,” she said. “A loan can provide a lot of relief to that stress, and the entrepreneur knows that they just need to keep making that monthly payment to keep things going rather than continue to pull cash out of their own pockets.”

But Oman offered a caveat.

“More money won’t necessarily solve a business’s problems — that’s why a thorough business plan is so important,” she said. “A lack of business knowledge and subsequently poor planning is a huge barrier to success.”

Oman said a great business plans shows lenders why their loan request is worthwhile.

“Realistic financial projections, strong management skills and sound research all build a solid case for that business’s success,” she said.

Accessing capital is a significant stepping stone for many start-ups and entrepreneurs, but many, due to their infancy or alternative business models, are denied traditional business loans.

Josh Anish, director of content for the small business lending website, Kabbage.com, said many of his website’s customers complain about traditional lenders.

“Small businesses are often judged solely on the credit score of the founder, which can be an extremely myopic view,” he said.

Instead of viewing the entire picture of revenue, social media followers and shipping information, these lenders only look at simplistic revenue formats. Anish said this can be problematic because “you could be bringing in $100,000 a year from Amazon and the bank might not care at all.”

One determined borrower who dealt heavily with financing rejection is Oliver Roup. Roup, the CEO and founder of VigLink, was rejected 95 times by investors before he secured seed funding from Google Ventures.

When he set out for funding as “a guy and a PowerPoint deck with no previous startup successes,” he said he was not aware of how rare it was for funding to be approved.

Despite the lengthy process, he said the experience was not terrible and “all in how you frame things.”

His rejections rarely were dead-ends and usually ended with the person recommending another outlet or source. The introductions were vital when he finally ended up turning to and succeeding with Google Ventures.

“I think we were able to have a lot of conversations with people based on the reputation of our investors,” Roup said. “The money alone would not have opened those doors.”

Despite the influx of alternative lenders, many borrowers are still denied, which ultimately hurts both sides’ bottom lines.

Oman said that lenders are missing out on potential business by avoiding riskier loans. She said that a small amount of capital can impact not only a single business, but the overall economy.

“A small business owner who is diligent and well-prepared has great economic value; she creates jobs, grows local economies and fosters a growing entrepreneurial spirit,” she said.

Anish agrees with Oman.

“Small businesses are the heartbeat of the U.S. economy and we need to leverage technology to get money in their hands as quickly and effectively as we can,” he said.