Getting a business loan is notoriously difficult but, seen from the lender's perspective, you can understand why.
Securing a business loan or financing for your small business can be incredibly frustrating, especially for first-time business owners who don’t know the ropes.
In fact, in its Spring 2015 small business survey, Nav discovered that despite having more business financing options available, such as online lenders, it’s still an uphill battle for small business owners to access capital. If that wasn’t bad enough, the increasing amount of financing options currently available may actually be making things worse for small business owners. The survey found that of those who were denied financing, 45 percent had been turned down more than once, and 23 percent didn’t even know why their applications were denied.
To clear thing-up, here are eight common reasons why your business loan was rejected, and how to make sure that won’t happen again.
1. Failure to understand your credit score.
The Small Business American Dream Gap Report that was mentioned above, found that one of primary reasons why a small business loan is turned down because the owner weren’t aware of their credit score. In fact, 45 percent of the entrepreneurs surveyed weren’t even aware that they had a business credit score. Additionally, 72 percent didn't know where to find information regarding the credit score. Even more troubling, if they did, over than eight in 10 small business owners admitted that they didn't know how to interpret their score.
Being aware of your credit score prior to applying for a loan will inform you if you have poor, or no, credit at all. If so, you can be certain that your loan application will be denied because you’re too too much of a risk.
You can check your credit score through companies like Experian, Dun & Bradstreet, FICO, and Equifax.
The good news is that after your review your score, you can either repair or build your credit by making timely payments, keeping your debts low, avoiding opening up too many lines of credit, and keeping existing credit accounts open.
2. Inadequate cash flow.
Lenders also want to make sure that you are capable of repaying your loan each month, on-top of being able to cover rent, payroll, inventory, and other expenses. So, if you’re spending more money each month then what’s coming, then you need to solve that cash flow problem.
The easiest ways to solve any cash flow issues is to invoice promptly, instituted late fees, have an emergency fund, and cut unnecessary expenses.
3. Limited collateral.
Lenders typically aren’t willing to risk lending money to businesses without some sort of promise of reimbursement. In other words, they want physical property that they can take if a loan is not repaid. Create a collateral document that lists everything you can put-up as collateral. You can include both business and personal assets since your business may not have the real estate or equipment to offer as collateral. In that case, you may have to offer your home or car as collateral.
4. You’re an early stage startup.
I’m a huge ‘Shark Tank’ fan but it has created this myth that business owners can walk-up to an investor with just an idea and get the funding that they need. The reality is that lenders want to see a track record, healthy revenues, and some experience in the market.
That’s not to say that it’s completely out-of-the-question to receive funding for your early-stage startup. You may have to seek alternative sources like crowdfunding, online lenders, grants, or small business loans by the government.
5. You already have too much debt.
If you or your organization is already buried in debt from other loans or lines of credit, lenders will probably be hesitant in extending any additional credit to you.
Make sure that you pay down loans and maintain low balances on any lines of credit that you have. If you can’t afford to payoff your debts as early, then negotiate with them. Most credit card companies, for example, will give you a lower interest rate, which means you can pay that balance off faster without all of that interest tacked-on.
6. You don’t have a solid business plan.
Without a solid business plan, investors probably won’t consider your loan application. To make sure that you loan is approved after it’s been submitted, make sure that you have an updated and thorough business plan that demonstrates that you’ve conducted research, proves that you know your customers (or at least potential clients), has a clear mission statement with goals in place, and contains a calculated estimate of sales and profit projections.
The Small Business Administration also suggests that besides your business plan, make sure that you have gathered and prepared your personal background, resume, income tax returns, financial statements, bank statements, and legal documents like articles of incorporation.
7. Your reasons for seeking a long don’t make sense.
Why do you need a loan? Is it because you want to purchase a lavish office filled with unnecessary business assets like an exotic fish tank and Apple Watch's for all of your employees?
That all sounds great, but a lender isn’t going to issue you a loan for those reasons. They want to make sure that loan will be used to grow your business so that you can pay them back.
Instead, your reasoning for a loan should a reasonable real estate purchase, financing essential equipment, long-term software and product development, advertising, or covering seasonal sale variance.
8. The outside conditions are too risky.
There are also times when outside conditions can influence the lender's decision. For example, if you want to expand your food delivery service, but there are either rising fuel or food costs, a lender may consider the loan too risky because those soaring prices may make it more difficult for you to turn-a-profit.
Make sure that you do your homework and keep-up with industry trends. If you notice that there will be outside influences that will jeopardize you may have to apply for a loan at a later time or look for alternative loans.