Access to capital, especially access by small privately held companies, is a component business of growth. According to Pepperdine University’s 2014 Capital Markets Report, while nearly 89% of business owners report having the enthusiasm to execute growth strategies, only 46% report having the necessary capital resources to successfully execute them.
Among the smallest businesses (those with less than $5 million in revenue) that sought bank loans in the previous three months, only 39% in the same study reported they were successful in securing a loan. It is also quite common for these small company owners to be turned down for loans and not know exactly the reasons why.
The Pepperdine’s study cited the top ten reasons lenders rejected business loan application. Weak economy? Bad credit? Poor management? Nope, none of those reasons even made the top five. In fact, seven of the top ten reasons combined only accounted for 40 percent of the failed loans. See graph below.
Number one? It was the “quality” of the applicant’s earnings or cash flow. Cash flow quality refers to the source and sustainability of operating cash. There’s a difference between cash generated from profitable sales and other cash coming from non-recurring sources like the sale of assets.
The quality can also be measured by the obvious tightness of a company’s cash position, which may be exposed by late payments to vendors or other lenders. This reason was cited by almost 30 percent of reporting business owners.
Number two? Twenty-three percent of failed applications cited insufficient collateral as the reason for loan declination, and 13 percent failed due to an existing heavy debt load.