Acquiring financing or a loan for your business can be quite a daunting task, especially if you’re among those business owners who don’t have a solid understanding of the related know-how. According to several news, there’re more options available than earlier to secure business loans in different forms of financing. Unquestionably, it’s important for the economy to gain access to capital, particularly by privately managed companies, as it’s an integral part of job and economic growth. Despite having more options available, it’s still a difficult job to obtain business loans, especially for the new business owners. According to a survey conducted by NAV, 45 percent of the business owners who were refused financing had been denied more than once and 23 percent of the applicants didn’t even know the reason behind the denial. To help you out in your endeavor to secure a business loan, we’ve jotted down some of the most common reasons for which your application might get rejected.
A credit score is the measure of your creditworthiness. Banks usually look at both personal as well as business credit scores when it comes to lending decisions and decide on the interest rates. The most common reason for having your business loan rejected is low credit score or absence of credit history. You can get your credit score checked through companies such as Equifax, Experian, FICO and Dun & Bradstreet. It’s important to understand that each credit bureau measures credit scores in a slightly different way and it sometimes remains unclear which lenders look at which scores. Usually, a low credit score can be for a number of reasons including missed or late payments to lenders, vendors, credit card issuers, bankruptcy etc. The good news is if you don’t have a high credit score like a minimum of 600 to obtain an SBA loan from a majority of banks, you can still look for the lenders who bother less about credit score. However, to raise your personal as well as business credit scores, you should spend well under your credit limit, make your payments on time and keep present credit accounts open.
Inadequate Cash Flow
Simply put, there is one thing common amongst all businesses and that is they exist to make profit. That’s why lenders often don’t find any reason to provide a loan to a business with severe cash flow problems. The reason for asking a loan can be anything – from launching a startup company to making expansions in an established organization, but you’ve to have sufficient cash flow that will empower you to repay your loan after covering the payroll, rent, inventory together with other expenses. As a business owner, you need to know the amount of money that is flowing out through your operations. In case more amount of money is going out compared to the incoming cash flow, you’ve to make changes. If your business is running on a tight margin, work towards cutting down the expenses, invoice promptly, prepare an emergency fund, institute late fees and find ways to increase revenue before sending out application for a business loan.
Lack of Collateral
Since the last economic downturn, banks and other lenders have become particularly risk averse and simply want to safeguard themselves in case a business owner fails to repay a loan. That’s why lenders exhibit least interest in providing loans to businesses that lack some amount of promise of reimbursement. Simply put, they want some sort of physical property, which can be taken by them in case you fail to repay. The amount of the loan is decided based on the value of the assets that you would offer as collateral. Homes and cars are the most frequently used forms of collateral, but if you don’t want to use your personal assets or don’t own anything that the lender considers as valuable, your business loan application might get rejected. In case you need a small amount of business loan, there are some lenders like PayPal Working Capital, Accion, Behalf etc that don’t require a lien or collateral. They generally make their lending decisions based on the cash flow of your business. You can also look for online lenders that provide loans at higher interest rates compared to traditional bank loans, but usually don’t require collateral.
You’re a Startup
In today’s business scenario, lenders simply want to see your track record, your experience in the market and healthy revenue. Hence, in case you’re a startup, it would become difficult to obtain SBA loans from a majority of the banks. Furthermore, due to your short-term presence in the business, you may not be able to build up adequate amount of business credit history, which would make you qualified for getting a small business loan. It doesn’t mean that your startup can’t get funding anyway. You can look for other options like Accion, a renowned nationwide loan provider that lends money to startup businesses. However, you won’t be able to borrow a significant amount from such sources – Accion provides a maximum loan amount of $30,000 to startups. Alternatively, if you’ve significant amount of online sales within a small amount of time, you can apply to PayPal Working Capital. In case you’ve huge amount of debit or credit card sales, you can look for providers such as CAN Capital for merchant cash advance.
Lack of Solid Business Plan
Unfortunately, this is another common reason for which the loan applications of small businesses often get turned down. Apart from a robust business plan, other mandatory things include filling up the application form correctly and providing all necessary documents. Remember that unless you’re able to provide the investors with a concrete business plan, they perhaps won’t even consider your application. That makes it highly important to have a thorough and updated business plan ready after you’ve submitted your loan application. Your business plan should mirror that you’ve conducted adequate amount of research, prove that you understand your prospective customers, contain a clear mission statement with achievable goals in place and comprise of calculated estimates of sales as well as profit prognosis. According to the Small Business Administration, apart from your business plan, you should have prepared and gathered all related documents like personal background, income tax returns, resume, bank statements, financial statements, leases, contracts, any permits and licenses required to operate and legal documents such as articles of incorporation.
You Already Have Too Much Debt
Ideally, investors want you to be utilizing a maximum limit of 30 percent of your total available credit limit. If you utilize too much of that, you’re considered as overextended and that makes them worry that you may fail to pay them back. For instance, if you have $50,000 line of credit and already have used $45,000 of that line, then your loan application will most likely get rejected. In case you or your business is already immersed in debt from lines of credit or other loans, lenders will usually feel reluctant when it comes to extending any further credit to you. Thus, it makes sense to pay down your loans regularly and try to maintain low balances on any of your available lines of credit. In case you’re unable to repay the debts on time, you should try to negotiate with them. For instance, majority of the credit card companies will agree to allow you a comparatively lower interest rate that means you can pay off the balance quickly without all of that interest applied.
Many Other Difficult Conditions
Some industries are simply known as risky to traditional lenders. For instance, restaurants have a significant failure rate and if you’re in this industry, it might become difficult for you to secure a business loan. Even if your business has excellent credit, collateral and is profitably run, outside circumstances can still influence the probability of getting your loan approved. For example, if you run a transportation business and the fuel price is about to rise, lenders will feel hesitant to provide you with a business loan. It may be expected by the investors that the rising prices of fuel are simply going to overtax your transportation business and make it harder for you to grow as well as generate a profit. Make sure that you’ve done your homework properly and you’re on the same page with the industry trends. If you find that there’re probabilities of outside influences that can jeopardize your growth, it’s advisable to wait for the right time to come or look for alternative ways of getting your business loan.
A finance industry veteran, Charles Brown writes articles related to current financial trends, and creates unique and useful content about business ownership for his company fastcredit.repair With a lot of knowledge and experience in this field, he has moved on to sharing his knowledge through writing.