There are many reasons a business loan rejection may occur. Obtaining a small business loan can be a headache and in some cases a painstaking process. This is true for company owners seeking a business loan for the first time. Today, many finance options are available for business owners than weren’t previously available. Lenders are now offering a host of loan options from Equipment Finance to Small Business Revenue Loans.
Some businesses owners apply for personal finance due to a low credit score. According to a 2016 New York Fed SBCS (Small Business Credit Survey) report 42% small businesses rely solely on the owners personal credit to secure debt. Most debt is secured by a by a personal guarantee which holds the owner responsible for the debts of the business.
8 business loan rejection causes:
1. You’re not sure how to calculate your FICO credit score
Nearly half of all small businesses weren’t aware they had a business credit score. Nearly 80% of business owners admit they don’t know how to calculate a business credit rating. Bad or no credit can have negative effects on the business credit report. An advantage of building business credit is that the owner doesn’t have to risk personal assets. You can access your score through credit reporting agencies, such as: Experian, Equifax and FICO.com. After checking your score you can elect to build or repair your credit. While the credit is being repaired try not to take on any new debt and try to keep timely payments on open accounts.
A business loan rejection can be harmful to your credit. Don’t shop your loan around unless you want to pick up the pieces of your shattered credit score. Most lenders will perform a hard inquiry, you want to avoid them if possible.
2. Inadequate cash flow
Lenders additionally want to make sure that you are successful in repaying your loan every month, on-top of being capable to cover rent, payroll, inventory, and other expenses. So, if you’re spending extra money each month then what’s coming, then you need to remedy that cash flow problem.
The best approaches to resolve any cash flow issues is to invoice promptly, instituted late fees, have an emergency fund, and reduce useless expenses.
3. Limited collateral
Lenders typically aren’t willing to chance lending cash to companies without some type of promissory note. In other words, they prefer bodily property that they can take if a mortgage is not repaid. Create a collateral file that lists the whole lot you can put-up as collateral. You can include both business and private assets because your business may additionally no longer have the real property or gear to provide as collateral. In that case, you may have to offer your domestic or automobile as collateral.
4. You’re an early stage startup
I’m a large “Shark Tank” fan! However it has created this delusion that company owners can walk-up to an investor with just a concept and get the funding that they need. The fact is that lenders require a track record, healthy profits, and years of experience in that niche market.
That’s not to say that it’s totally out-of-the-question to obtain funding for your business startup. You could also seek alternative sources like crowdfunding, online lenders, angel investors, grants, or small business loans by means of the government(SBA).
5. You already have an awful lot debt
If you or your organization is already buried in debt from other loans or strains of credit, lenders will be hesitant in extending any extra credit to you. Too much existing debt is a major cause of a business loan rejection.
Be sure you pay down loans and maintain low balances on any company or personal lines of credit. If you can’t afford to payoff your debts as early, then negotiate with them. Most credit card companies will offer you a lower rate, which you can pay off that balance faster and eventually reduce your overdue balance.
6. You don’t have a solid business plan
Without a strong business plan, investors in all likelihood won’t consider your loan application. To ensure that your business loan is accepted after it’s been submitted, make sure that you have an up to date and thorough business plan. This plan demonstrates that you’ve performed research, proves that you recognize your customers (or at least conceivable clients). Your business plan should state a clear mission with goals in place, and consist of a calculated estimate of income and profit projections.
Besides an effective business plan, make certain that you have gathered and organized your personal background, resume, profit and loss, tax returns, financial statements, bank statements, and documents like articles of incorporation.
7. Your motives for seeking working capital don’t make sense
Why do you want a loan? Is it due to the fact you want to purchase a lavish office crammed with needless commercial enterprise property like an unique fish tank and Apple Watch’s for all of your employees?
That all sounds great, however, a lender isn’t going to approve a loan for these reasons. They want to make certain that their capital will be used to develop your business so that you can pay them back.
Your reasoning for a business loan ought to be a realistic real estate purchase, financing vital equipment, long-term software program and product development, advertising, or overlaying seasonal sales variance.
8. The outside stipulations are too risky
There are also times when external stipulations can impact the lender’s decision. For example, if you prefer to expand your food shipping service, however there are both rising gasoline or food prices. A lender can also think about the loan too volatile due to soaring price inflation might also make it more hard for you to turn-a-profit.
To avoid a business loan rejection do your homework and keep up with relevant trends in the industry. Be aware that there will be external influences that will jeopardize you may have to apply for a loan at a later time. You can always seek other alternative means of small business finance.