Being turned down for a business loan can make you feel like you’re stuck in limbo without the capital you need to start or expand your company. But you’re not alone. Nearly 3/4 of small business loan applications are rejected by large banks, and about half are rejected by small ones, according to the July 2019 Biz2Credit Small Business Lending Index. The reasons why vary from business to business, but understanding these 4 common reasons can help you turn things around next time you apply for financing.
1. Credit Issues
Business owners have 2 types of credit to watch: personal and business. That’s right—your business has its very own credit report and credit score from Equifax, Experian, and Dun & Bradstreet, the 3 major business credit bureaus.
A low credit score can stem from a history of late payments, unpaid tax liens and judgments, or high use of available credit. But lenders can also ding you for not having established as long enough credit history.
You can turn around a low score by paying down debt, paying your bills on time, and keeping your account balances low. If insufficient business credit is the issue, Credit Karma recommends taking the following actions to establish a credit history:
- Apply for and use a business credit card.
- Open a business bank account under your business name.
- Get a business phone under your business name.
- Apply for an employer identification number (EIN) from the IRS.
- Register your business with Dun & Bradstreet to get a free DUNS Number.
Taking these steps—and being consistent—can help you improve your business credit score so you can qualify for financing, maybe even at a better rate.
2. Insufficient Collateral
Lenders prefer borrowers who have skin in the game—assets offered up as collateral, which the borrower would forfeit if they defaulted on their loan. Before you reapply for financing, document all of your personal and business assets, such as equipment, bank accounts, real estate, vehicles, and even accounts receivable, and then decide which you’d be willing to use to secure a loan. As you work through the list, consider your likelihood to default and what the consequences would be if you had to forfeit the assets.
3. You Asked for Too Much Money—or Not Enough
Banks look at your debt-service ratio to determine whether you’ve got enough cash flow to make the loan payments. To calculate the ratio, take your annual net operating income and divide it by your annual debt payments. Higher numbers are better. You’ll need at least 1.15 for a Small Business Administration (SBA) loan guarantee, and lenders could require a stronger ratio. Next time you apply, run your anticipated loan amount through an online loan calculator to make sure you’re not overreaching.
At the other end, it’s just as much work for lenders to extend a large loan as a small one, but they make more money on the large one. If you’re finding yourself feeling pressured to apply for more than you need just to qualify, consider alternative sources of financing, such as crowdfunding, angel investors, or an SBA microloan.
4. No Business Plan
Writing a business plan speaks volumes about whether your company is a good investment, and it’s one of the primary tools lenders use to evaluate business loan applications. If yours wasn’t up to snuff the last time you applied for a loan, take the time now to whip it into shape. In addition to descriptions of your company and its structure, your product or service, and your sales and marketing plan, the SBA recommends that you present the following:
- A market analysis
- Financial projections based on your income and cash flow statements, balance sheets, and budgets
- An appendix with documentation supporting your application
Applying for a business loan is never easy, but it’s preferable to letting cash-flow issues keep your company from growing. By shoring up your credit, keeping your requested loan amount realistic, and wowing lenders with a business plan that shows you and your company in the best light, you’ll maximize your chances of getting the funding you need to take your business to the next level.