You Botched the Application
One of the biggest contributors to loan rejections is also among the most basic: the applicant didn’t handle the process correctly. This includes leaving sections of the application unfinished, entering incorrect information, or failing to include the required documentation.
You can reduce the risk of this fate by preparing your documents ahead of time. You’ll find it’s much easier to write a business plan or locate your tax returns when you don’t do it the night before the deadline.
Put yourself in a lender’s shoes and it’s understandable why they’re sticklers for details. Imagine if a friend asked you to borrow money but had no clear idea what they would be spending it on. That kind of disorganization would probably be met with a polite rejection from you. Most people only loan money to a friend if they trust them and have an idea of where the money is going.
Your Credit Score Is Lacking
Credit scores result from an algorithm that lenders use to predict how likely you are to repay the money they might provide to you. The determinants of your score come down to relevant factors such as how promptly you pay your recurring bills and how much of your credit card balance you pay off each month.
Just because your score isn’t where it needs to be for one loan doesn’t mean you’re out of luck. Each lender has their own standards and they generally aren’t shy about broadcasting them. So when you see credit score requirements associated with a loan, take them seriously. You’ll save yourself a lot of time by not chasing loans you aren’t qualified to receive
Your Business Is Too Green
Every business needs to start somewhere, and there’s no shame in being a young company. It’s actually something to be proud of because it takes determination to turn your idea into a reality.
But many lenders will be understandably skittish when dealing with businesses that lack a track record. Your ability to repay your debt is substantially impacted by the amount of money your business brings in, so the more evidence of cash flow you can provide, the better. And for young businesses, this type of evidence is in short supply.
You Need More Collateral
Many small business loans are secured loans, meaning you need to offer something of value to protect the lender in case you aren’t able to make the necessary payments. Assets used for collateral include vehicles, homes, properties, equipment, and retained income.
When you lack an adequate asset to use as collateral, you’ll find that lenders are more likely to turn down your applications. While this can be frustrating for borrowers, it makes sense. If lenders always handed out money without guarantees, it wouldn’t be long before they’d run out of it.
Your Cash Flow Is Lacking
When lenders want to make a quick assessment of an applicant, they often start with cash flow. Not only does it show the strength of your business performance, but it provides a glimpse into your ability to manage details and stay on top of expenses.
Some businesses experience seasonal slumps, which is understandable to lenders. What they’ll want to see is that you can balance your financial obligations year-round. Accounting software makes this easier to accomplish by tracking invoices so you can collect payments promptly. Also, this type of software can quickly create cash flow reports for loan applications.
You’re In a Risky Industry
It’s not uncommon for a loan application to be denied because the lender viewed it as risky. For example, the construction, restaurant, and farming industries are fickle enough that some lenders may get skittish.
This scenario isn’t a surprise, as you’d probably use the same discretion with a friend looking to borrow money. If you felt the likelihood of them defaulting on the loan was high, there’s no way you’d open your wallet.
If you’re in an industry that is considered risky, you still have financing options. Start by seeking a loan from the Small Business Administration (SBA), which strives to provide funding for businesses that have been rejected when seeking other avenues.
You Went for the Wrong Loan
There are times when a borrower has all their ducks in a row, yet they’ve simply applied for a loan that isn’t a good match for their business. Perhaps your business doesn’t qualify due to its size or structure, or your business plan calls for using the money in ways the lender doesn’t approve.
The point is that your due diligence needs to take into account the nuances of each lender so you don’t waste time applying for a loan that will never be possible for your business.
Your Business Plan Is Underwhelming
Many lenders ask for business plans as part of the application process. They’ll review your plan to see how you intend to spend their money, as well as to gauge your organizational and strategic abilities.
Never rush this stage of the application. Your business plan is your sales pitch, as well as your guiding light. If done correctly, it will sufficiently impress the lender so that you can obtain the financing you require. Once you have the money, it will then serve as your blueprint for spending it in the most effective way possible.
Your Debt Utilization Raises Red Flags
Lenders will pay close attention to the credit currently available to your small business. If you’re using too much, it could mean you are already stretched thin and might not be able to handle your repayments consistently.
On the flip side, if you haven’t utilized credit in the past, you could be considered a risk because you won’t have a debt track record from which they can base their decision. They’ll want to see that you’ve borrowed in the past and successfully handled your obligations.
Your Loan Isn’t Cost-Effective for the Lender
Don’t forget that it costs money to lend money. So if you apply for a small loan from a larger lender, they might see it as more effort than it’s worth. There are plenty of financing options for small dollar amounts, but you need to make sure you’re approaching the right lenders.
The Best Way to Begin Your Loan Search
Many of the mistakes listed above involve carelessness on the borrower’s part. They didn’t research the lender well enough or they didn’t carefully prepare their application. So pump the brakes a bit and take the time to understand your financial needs and identify the exact amount of money you’ll need to borrow.
According to the SBA, the median small business loan in America is $140,000. And the majority of loans are for less than $250,000. These numbers don’t necessarily mean you should follow the trend and ask for $140,000, but it provides a helpful baseline as you decide on the best amount for your needs.
Another crucial factor is when the funds will be in your account. If you need the money right away, you’ll need to look at a small selection of expedited loans. If you have a more generous timeline, you can probably seek out slower options such as SBA loans (which can take up to 3 months to fund).
After you’ve had the chance to identify your needs clearly, you’ll be able to browse the many options available and choose a few that match up with your business. Some of the most popular small business loan options include:=
- SBA Loan
- Business Term Loan
- Short Term Loan
- Merchant Cash Advance
- Business Line of Credit
- Business Credit Card
- Equipment Financing
- Commercial Mortgage
- Accounts Receivable Financing
- Business Acquisition Loan
- Startup Loan
Your unique situation will dictate which of these financing options are possible contenders. Once you’ve narrowed down the list, you’ll need to look for comparables that will enable you to find out which loan costs the least. The 4 most popular pricing metrics are:
- Annual Percentage Rate (APR): The yearly cost of a loan.
- Total Cost of Capital (TCC): All interest, fees on loans that don’t charge interest, and ancillary fees.
- Average Monthly Payment: Breaks down the cost into a monthly view.
- Cents on the Dollar: Shows how much you’d pay in fees and interest for every dollar borrowed.
You’ll also want to watch out for hidden charges that lenders sometimes bury in the details. Common examples include early repayment fees or processing fees.
Helpful Comparison Tools
As you look at loan comparables, you may find it difficult to crunch the numbers and find clear answers. There are plenty of loan calculators available that can help with the process.
Other times, you’ll need to break out the big guns. The problem is that many lenders treat their disclosures differently, making it hard to make accurate comparisons. For example, finding the best APR between 3 loans is tricky if the metric is listed in 3 separate ways.
To help remedy this issue, the Innovative Lending Platform Association partnered with some of the industry’s leading lending platforms to create SMART Box™ (Straightforward Metrics Around Rate and Total cost). It’s a comparison tool that promotes common language and more transparent disclosure standards. You’ll probably benefit from using its convenient pricing metrics and calculations.
“Access to capital is a top priority for NSBA and we appreciate how SMART Box allows small businesses to more fully assess and compare lending options,” says Todd McCracken, president and CEO of the National Small Business Association. “This type of price transparency, along with best practices like the ones adopted by the Coalition for Responsible Business Finance (CRBF), will help solidify the trust between non-bank lenders and small businesses.”
Leveraging tools like SMART Box is a great way to save time and improve your odds of choosing the best loan for your business. The important thing to remember is that there are numerous resources available to you, so never feel like you need to go through the process blindly.
Giving Yourself the Best Chance of Success
Now that you know some of the hazards to avoid when applying for a loan and some of the strategies for choosing the best loan for your unique needs, here are some recommendations for the actual application preparation and submission.
First, make sure to give yourself enough time to prepare thoroughly. Even in situations where the money is needed quickly, you won’t save any time by rushing things. Sure, you may get the application submitted blazingly fast. But sloppy applications are likely to get denied, putting you back at square one.
Remember, it’s wise to begin assembling the necessary documentation well before it’s time to fill out an application. You might know exactly what you’ll need for the loan you end up selecting, but having a wide range of documents on hand will improve your business plan and help you better strategize your finances.
Here’s a quick look at the documents often required for a bank loan:
- Business plan
- Proof of cash flow
- Profit and loss statements
- Balance sheets
- Personal background information such as education history, previous addresses, aliases, and criminal record
- Credit reports
- Tax returns from the past 3 years
- Personal financial statements
- Projected financial statements
- Personal and business bank statements from the past year
- Value of possible collateral
- Business licenses and registrations
- Articles of incorporation
- Copies of third-party contracts
- Franchise agreements
- Commercial leases
Another key aspect of your preparation is your personal and business credit scores. Not only will good credit scores open more doors for you, but they’ll also save you substantial amounts of money over the lifetime of a loan thanks to more favorable interest rates and terms.
You’ve likely experienced this same scenario if you’ve sought home or vehicle loans in the past. If your personal credit score was healthy at the time of your application, you were able to save money by getting a lower rate and more favorable repayment terms on the loan.
Don’t worry if your credit scores aren’t quite where they need to be because there are simple strategies for improving them. First, set up automatic payments on your recurring financial obligations. This strategy removes the risk of human error, helping you establish a perfect track record of payments. If you can’t schedule an automatic payment with the recipient, just add them as a payee with your bank app. When neither of these approaches is possible, at least create a payment reminder in your calendar so you’ll never needlessly damage your credit with a missed payment.
Second, proactively monitor your credit with TransUnion, Experian, and Equifax. It’s important to search for errors. Incorrect entries on your report can bring your score down, and about 1 in 5 Americans have such mistakes on their credit reports. Any time you find an error, be an advocate for yourself and get it corrected as soon as possible.
With all of these strategies, it’s helpful to put yourself in the lender’s shoes. Their job is to simultaneously fund small businesses and also safeguard their money. It’s a difficult balancing act, and they likely take no pleasure in rejecting applications. You can make things easier for both them and you by carefully preparing each application and ensuring that you’re giving them ample reasons to give you the green light.
If your loan is approved, throw a little party with your friends. If your application is denied, don’t despair. Remember, the majority of loans are met with a hard no. Take positives from the experience by learning from your mistakes and submitting an even stronger application the next time around. This approach ensures you’ll always be progressing and you’ll eventually get the financing your business requires.