Small businesses need to borrow money all of the time. Whether it’s to start your business, expand it, or keep it running, you need the help. A business loan can fill that void, helping have the funds needed to properly fund your business.
The truth of the matter is, though, the lenders turn down a large number of applications on a daily basis. While it’s scary to think that you could be one of them, don’t let it get to you. If you get denied, don’t worry about it. Figure out the reasons, fix it and move onto the next lender.
Educating yourself on the most common reasons lenders turn down applications can help you best prepare while ensuring that you have a thorough understanding of what you’re up against when you try to apply for a business loan.
Low Credit Score
Your credit score says a lot about you. Lenders can look at that three digit number and decide if you are a good risk. A low score means you don’t pay your bills on time and aren’t financially responsible. A high score means you do pay your bills on time and are a lower risk of default.
If you do have a low score, don’t fret. There are still lenders out there that may work with you. It depends on your other qualifying factors. For example, a brand new business with no history and a low credit score probably isn’t a good risk, but an established business with high annual revenue and a somewhat decent credit score may be just fine.
Know your credit score before you apply for the loan to give yourself the best chances. If you know you have a low score, you can focus on lenders that cater to people in your situation to avoid the risk of a denied application.
Your Business is Risky
This is two-fold. Lenders look at your business history – how long have you been in business? They also look at the riskiness of your business itself. Is it a risky industry? Do businesses go under often in your industry?
Lenders put all of these pieces together. A brand new business in a risky industry, say restaurant or construction industry will likely get turned down for a standard business loan. But a restaurant that’s been in business for many years may have a better chance of approval. If you have one or the other risk factors, but not both, you have a better chance of approval.
You Don’t Have Enough Collateral
Lenders love collateral. It gives you skin in the game or a reason to make your payments on time. If you don’t make your payments, you risk losing your collateral. If you don’t have any or enough collateral to put up, lenders may deny your application. It depends on your other qualifying factors. If you have a low credit score and no collateral, you can expect your application to be turned down, but, if you have a high credit score and no collateral, you may find willing lenders if you shop around.
You Don’t Have a Good Business Plan
When lenders invest in businesses, they invest in their likelihood of succeeding. This means lenders want to see your business plan. What are your goals for your business? Have you met any of them? Do you plan for growth and expansion or is your business plan just ‘okay’.
Your business plan is the lender’s view of your business. It’s their way of seeing how you operate and what you want from your business. If your business plan isn’t’ anything special, lenders may think you don’t care about your business and won’t risk giving you the loan.
You Don’t Have Enough Money
It sounds funny to say that you need money to get a loan, but lenders look closely at your cash flow. A business’s cash flow shows its ability to operate on a daily basis. If you constantly struggle, it could be near impossible to keep your business afloat, especially after you take on a new loan.
Lenders look at the overall picture though. They don’t take a snapshot of your business right now and if you don’t have the cash flow, you can’t get approved. Instead, they look at the ebb and flow of your business’s cash flow. Do you have a decent average over time or are you constantly struggling?
If you are struggling, why is that? Are you overextended? Do you have too many debts? That’s another factor lenders look at in terms of your cash flow. Are you already tapped out as far as your monthly liabilities? Would adding a business loan to the mix make it even harder?
Lenders want to know that you can make your loan payments without issue. If you can’t, it’s a red flag and lenders may turn down your application.
You Didn’t Apply for the Right Loan
There are hundreds of business loan options out there today and no two businesses will have the same needs. You need to know the specifics of the loan before choosing which one to apply for with a lender. Some loans have certain requirements such as:
- Time in business
- Specific industries your business must be in
- A specific amount of cash flow
- A specific business structure
Each lender sets its own requirements. Read everything you can about a loan or ask the loan officer before applying. While it’s not the end of the world to get denied for a loan, it does waste your time and can be deflating. Knowing as much as you can about the loan ahead of time can help you choose the right option.
The Lender Doesn’t Want to Give you the Loan
This one sounds odd, but it’s true. Lenders are in the business to make money. If they look at your loan and think it’s not worth their time or effort, they may deny the application. Whether you need a small loan amount or a short-term, some lenders just don’t want to be bothered. That’s why it’s so important to find out the requirements for each loan and determine what lenders really need. Choosing a lender that specializes in the type of loan you need gives you the best chance of approval.
Gather Your Documents
If you think now is the time to apply for a business loan, you should know what you need to have for the bank. The more documentation you provide upfront, the faster the process may go and the easier the lender can make a decision:
- Personal information including your social security number to pull your credit
- Business information including EIN to pull your business credit
- Personal resume and business plan
- Individual and business tax returns for the last 3 years
- Personal and business asset statements
- Balance sheets, Profit & Loss Statements, and Income Statements
- Proof of collateral’s value
- Legal documentation regarding your company structure
Finding the Right Loan
The key is to know what type of loan you want before you start shopping. Ask yourself why you need the money. Are you trying to buy equipment, start your business, expand your business, increase your cash flow, or buy a new building? The purpose will help you find the right lender.
Also, consider how fast you need the funds. Is this an immediate need or something that can wait? That will determine the type of loan you need too. More immediate needs must be met by credit lines or credit cards rather than full blown business loans.
You’ll also want to shop around and find the lender with the requirements you meet and the lowest interest rates/fees. You want the loan to make financial sense for you in the long run. Don’t just focus on the fact that you need money – look at the big picture. Look at the loan’s APR, the monthly payment, and the cost per dollar that the loan costs. This will give you a better idea of which loan is right for you.
Comparing Your Loan Options
It may seem overwhelming to compare your loan options when looking at all of the factors. Take your time and really explore what the loan has to offer.
If you can’t figure out how to compare your loans, consider using a tool such as the Innovative Lending Platform Association SMART Box. This comparison tool helps you break loans down so that you can compare them ‘apples to apples’ so to speak.
The best thing you can do when you need a business loan is to shop around. Look at your options, know what they will cost and then find out how you qualify. If you don’t qualify right away, pick up the pieces and figure out what to do next. There’s always a way to apply for a business loan again and hopefully this time, with better results.