Getting a business loan can be sometimes difficult but, seen from the creditor’s point of view, you can understand why. Obtaining a business loan for your small business can be frustrating, especially if is for first-time business owners who don’t know the process. The increasing amount of funding possibilities that may be obtainable will be making things worse for small business owners. Studies have shown that for those who were denied access to loans, 40 percent had been turned down more than once, and 20 percent of the applicate didn’t even know why their applications were rejected.
Today we shall be talking about 7 common reasons why business loans are been rejected and how to stop it from happening.
1. Failure to understand your credit score.
Most business owners don’t understand what the credit score means. The Small Business American Dream Gap Report that was mentioned above found out that one of the principal reasons why a small business loan is turned down is because the owner wasn’t aware of their credit score. 40 percent of the entrepreneurs surveyed weren’t even aware that they had a business credit score. As well as 70 percent of small business owners didn’t know where to find information concerning their credit score. Being mindful of your credit score before applying for a loan will notify you if you have poor, or no, credit at all. If so, you can be rest assured that your loan application will be rejected because you’re too much at risk.
The good thing is, after you have reviewed your credit score, you can either repair or build your credit score by making your payments on time, keeping your debts low, avoid applying for different loans from different lenders, and keeping existing credit accounts open.
2. Inadequate cash flow.
it means a poor cash flow income, which also means when the cash flow is insufficient to meet the outgoing cash flow needs of your business. a reboots cash flow comes from your sales, interest income, investment and borrowed funds. This is the reason why lenders also make sure that you can pay back the loan each month, on top of being able to cover your rent, payroll, and other expenses. But if you are spending more money each month than your income, than you need to solve that cash flow problem.
The simplest ways to solve any cash flow issues is to introduce late fees, have an emergency fund, and cutdown unnecessary expenditures.
3. Limited collateral.
Financiers mostly find it hard to give out loans to business owners who has limited collateral and without some sort of promise of paying back the loan. Specifically, financiers/ lenders want to see a physical property or goods that they can take if the loan is not paid back. So, business owners need to create a collateral document listing out things they can put up as collateral / have collateral that can cover the amount of loan they want to apply for. Business owners can add both business and personal assets since your business may not have the real estate or equipment to offer as collateral.
4. Early-stage startup.
I’m a huge ‘Shark Tank’ fan this has created it myth that business owners can walk-up to investors/lenders with just an idea and get the funds that they need. The truth is that 85% of lenders will want to see a track record, healthy revenues, and some experience in the market of your business before the can borrow you the funds. But at the same time, it doesn’t mean that you can’t get loan for your early-stage business. You may have to seek alternative sources like crowdfunding, online lenders, grants.
5. You already have too much debt.
If you as a business owner is already concealed in debt from other loans companies, financiers will probably be uncertain in giving you any additional credit /loan. Business owners need to make sure that they pay their loans and maintain a low balances on any lines of credit that they have. If they can’t afford to pay off their debts on time, then negotiate with them. Most credit card companies, for example, will give you a lower interest rate, which means you can pay the balance off faster without all the interest at once.
6. You don’t have a solid business plan.
Without having a solid business plan, investors/ lenders won’t consider your loan application. Business owners must make sure that their loan is approved after it’s been submitted, making sure that they have an updated and thorough business plan that demonstrates that they’ve conducted research, proves that they know their customers (or at least potential clients), and it has a clear mission statement with goals in place, and covers a calculated estimate of sales and profit forecasts.
7. The outside conditions are too risky.
Outside conditions can influence the lender’s decision. For example, if a business owner who runs a food delivery business and wants to expend, but there are rise fuel or food costs, a financier may consider the loan too risky because those rising prices may make it more difficult for you to make profit. So, business owners are advice to make sure they do their homework and keep up with industry trends.