Taking out a business loan can be a wise move if you’re looking to grow or expand your business. However, some entrepreneurs might be in for a shock when their business loan application is denied. Here are eight reasons why business owners are routinely turned down when applying for business loans.
Poor credit score—Your credit score reflects your ability and reliability in paying on debt, as well as current balances on any debt outstanding. Any lender will check your credit history. If your credit score is bad and reflects late or missed payments, an extremely high debt level, or too many defaults, you’ll be denied a business loan.
Even an alternative lender is going to pull your credit report, so if you know you have issues look into clearing them up before applying for a business loan. Although many alternative lenders offer bad credit business loans, it would still be wise to try to improve your credit score before applying because bad credit increases the likelihood of a denial in almost every circumstance.
Bankruptcy—Any bankruptcies will raise red flags for lenders. Bankruptcy demonstrates a mishandling of funds or poor business decisions, and you will be less likely to be approved for a small business loan with a bankruptcy.
Bankruptcy often remains on one’s credit report for between seven to ten years after you filed. Be prepared to tell the history of what happened and how you plan on preventing it from happening again if you want any chance of receiving a business loan.
Defaulting on previous loans—If you have defaulted on business loans in the past be prepared to answer a lender’s questions and tell the story of what happened. If it was due to a divorce, or poor business decisions made by a partner and you have a solid business plan now, you may have a better chance of obtaining business funding. Lenders want to ensure that you can pay them back, though you’ll likely pay a higher interest rate because they also need to hedge their risk.
Tax liens—Tax liens occur when the government, either federal, local, or state, places a claim against your assets because you’ve failed to pay your tax debt. Often these liens appear on your credit report or will be discovered if you attempt to secure a business funding.
The easiest way to solve this issue is to pay off the liens. If this is not possible, try to fortify the rest of your loan application as much as possible to demonstrate your ability to repay lenders. At a minimum, you’ll need to produce an agreed-upon plan for repayment with the tax authority to show your lender.
Poor or No Collateral–Even if you have a poor credit score or issues in your past, sufficient collateral pledged to secure the business loan may be enough for you to get funding. You could be asked to pledge high-value fixed assets such as real estate or commercial equipment or some other form of collateral depending. It is possible that you will not get approved for a business loan without collateral, although most lenders today have plenty of unsecured business funding options for a premium.
Inconsistent revenue—Lenders look at historical and current cash flow in order to determine your likely ability to repay the loan. Any potential lender will analyze your cash flow to identify seasonal trends, cyclical ups and downs, and any indicators that your business could be in trouble that a loan can’t fix. Insufficient or irregular earnings that can’t be traced to seasons or normal business cycles are one of the main reasons business loans get rejected.
Insufficient business experience— The length that you’ve been in business is another factor in a lending decision. If you haven’t been in business long, less than two years, then do not be surprised when a lender questions or outright rejects your application. A formal, detailed plan for how you will use this loan going forward can slightly offset being newer, as can consistent revenue growth. There are many alternative lenders today that offer small business loans for newer businesses, although with every lender the longer you are in business the better your options are for both approvals, and the rates and terms of that approval.
Not a favorable industry— Entrepreneurs will often try their hand in unfamiliar fields and fail, or some businesses may be struggling because their industry is dying out.
Risky industries such as boutiques and explicit ecommerce operations have less of a chance of making it than more traditional types of business. Finding a lender experienced in your industry can increase the likelihood of getting approved so it is always a good idea to see if your chosen lender disqualifies certain industries.
If any of these issues apply to your situation, think about how you could fix them. You’ll get a better interest rate and payment terms with every lender if you can raise your credit score or improve your business’ financials. In general, your odds of getting approved will improve if you address any of these eight barriers to getting a small business loan.