Applying for a business loan doesn’t always go as planned. Sometimes you are expecting to get approved and unfortunately, the opposite happens. In some cases, you are declined for a loan and nobody tells you why. A lender might reject you for credit, for cash-flow, or for lack of collateral, but if you don’t know why, it’s virtually impossible to correct the problems.
Understanding what lenders care about is a crucial component to making sure that you don’t waste time. It’s time-consuming filling out documents and putting together paperwork, only to be told you have been declined. Wasting time on this means you are not focusing on the important aspects of running your business.
Read about the loan requirements for the funding program you are applying for before you complete the paperwork.
Here are some of the most common reasons a loan application is declined.
One of the most common reasons business owners is denied a loan is due to their personal credit history. Your personal credit is an indication of whether or not you pay your personal bills on time. This is the easiest decline for you to avoid. Monitor your personal credit using companies like Credit Sesame and be sure your credit score meets the lenders’ minimum threshold.
Just like your personal credit, your business has a credit score also. By making sure your bills are paid on time and you remain in good standing with your vendors, you can avoid rejection for past due business bills.
Tip: the bigger the vendor, the more likely it is they report your payment activity to the local credit bureau. Bear in mind that utility and credit card companies are the first to report.
Lenders want to make sure you can repay your business loan without a hiccup. If your business has cash flow issues, and you can’t show the ability to repay, it’s almost certain your application will be declined. A common mistake is waiting until the last minute to apply for a loan. The loan application process is all about showing your business is healthy, don’t wait until it’s too late!
Lack of Collateral
If you are applying for a loan that requires collateral, you might want to check to see what type of collateral is needed. The most common types of collateral are equipment, inventory, accounts receivable, and commercial real estate. Some lenders don’t require collateral while others do. If you don’t have the collateral a lender is looking for, you can always apply elsewhere.
These are just a few of the reasons your loan application may be rejected. Don’t hesitate to ask your lenders questions, and don’t take no for an answer. You should find out why your loan application was rejected to learn what you can do to fix it. If you fix the problem now, you can avoid being rejected in the future.
Lack of Time in Business
Startup companies may not have enough business credit history to qualify for small business loans. Keep in mind that there are suppliers that won’t always report your payments to credit agencies. To build your business credit score, make sure to set up an account with suppliers that do report payments.
It’s possible to have a successful business with a good revenue stream even if you haven’t been in business for long. You need to find the right lending company that will take the time to consider your situation. There are lenders that require a minimum number of years in business, while others do not. Be sure to know your options before you apply for a loan.
Not Asking for Enough Money
For banks and credit unions, the cost of servicing loans that are less than $100,000 is not worth it. This is one of the main reasons why loan applications for small amounts of money are usually rejected.
Check your financial projections and business plan to ensure that you’re not underestimating the cost of the loan. If you think you need more, don’t hesitate to reapply. However, if you think that you only need less than $100,000, you can opt for alternative financing options, like invoice financing or a merchant cash advance.
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Getting rejected for a loan you diligently prepared for is discouraging. To increase your chances of approval, be sure to know the reason why you got rejected; rectify it, and then reapply for a loan. If you would like a more in-depth explanation on how the loan application process works, and how you measure up, talking to financial advisors can help answer your questions and place you on the right path.