CAT / FIA FFM Notes: D4bc. Reasons why a small business can find it difficult to obtain finance | aCOWtancy Textbook (2024)

FAQs

Why obtaining finance might be difficult for a new business? ›

If a business/project is considered risky, the bank may charge a higher interest rate, which a small business can not afford, or the bank may decide not to lend at all. Small businesses are not large enough to access the capital markets. Owners may not have the personal wealth to provide additional finance if required.

Small business owners find it challenging to raise capital because of several factors. Among them is their relative financial riskiness, which makes many financial institutions reluctant to offer them loans and credit. This also makes investors unlikely to invest in small businesses.

Factors that impact business loan approval

Lenders place the heaviest weight on your cash flow, credit history and time in business. They'll use this information to approve or deny your loan and determine your interest rate. Don't get discouraged if your business doesn't meet all these standards.

What has changed is how much more difficult raising money has become compared to the headier days of 2021. Investing conditions have become dramatically more competitive, so it behooves entrepreneurs seeking capital to recognize the conditions on the ground and be as prepared as possible when fundraising.

The most common reasons small businesses fail include a lack of capital or funding, retaining an inadequate management team, a faulty infrastructure or business model, and unsuccessful marketing initiatives.

Lack of customers and contacts

New entrepreneurs often lack the customer base, social media following and valuable contacts that more established business owners enjoy. As a result, launching a crowdfunding campaign or making connections with investors can be a challenge.

Business loans. Bank financing through business loans is one of the main sources of financing for small and medium-sized businesses. Not all commercial loans are equal. Lending institutions offer different advantages, such as personalized service, flexible repayment terms and varying interest rates.

Why seek funding? ›

Companies Need Working Capital

Not having enough funding can adversely impact a business's future. Most companies seek external financing to get enough capital to accomplish their work goals. For example, a loan might pay for short-term funding while you can use the rest of the money for the company's growth.

Grants can provide valuable resources for organizations to carry out projects or provide services they otherwise would not be able to. It is important to remember, however, that grants are competitive. A lot of time and preparation are required to find grant opportunities, plan a project, and then develop a proposal.

The factors that affect small business growth include business experience, sector classification, profitability, legal status, location satisfaction, age, and size. The factors that affect small business growth include owner-manager characteristics, firm characteristics, financial factors, and the external environment.

The number one reason small businesses fail is inadequate cash flow management.

Lack of investor interest

Additionally, if the industry or sector you operate in is currently out of favor with investors, it will be increasingly challenging to attract new investors or funding.

Poor credit is by far and away the biggest factor why car finance is refused. Having a poor credit score is viewed by finance companies as a higher risk, and they're therefore more likely to reject an application for car finance.

Working in finance requires diverse skills, including a strong foundation in math and analytics, excellent communication skills, and a deep understanding of financial markets and products.

Bank business loans typically have low interest rates and competitive terms, but can be hard to qualify for. You'll likely need strong personal credit, established business revenue and two or more years in operation to access bank financing.