The majority of entrepreneurs seek loans for their business operations. Unfortunately, most loan applications are rejected. These corresponding statistics suggest that many of the small business owners you know have experienced the frustration of a denied application.
While it would be incredibly convenient if every application got the green light, that scenario would be unsustainable. Lenders have to be judicious with their money, just as you are likely cautious when it comes to lending your possessions to others. Imagine if you owned a new ski boat and faced constant requests from friends and family seeking to borrow it. You’d probably think long and hard before giving the keys away.
For lenders, your loan application is the best way to determine whether or not they can trust you with their money. If it’s airtight, your chances are bright. But if mistakes creep in, the odds of success plummet.
Here are 7 of the most common issues that result in a rejection:
1. Incomplete Application
Because lenders make informed decisions based on the contents of your application, forgetting to complete a section, including erroneous information, or neglecting to send the required documents makes their decision much easier. If you can’t be trusted to fill out an application correctly, how can you be trusted with a large sum of money?
You can avoid this scenario by gathering your financial documents and preparing your business plan long before you reach the point where it’s time to submit an online application.
2. Insufficient Track Record
Lenders will look at your cash flow and business history to get a clearer idea of how likely you are to fulfill your obligations. If your business is new, it’ll often lack the track record needed to instill confidence. The good news is that certain loan options are ideal for newer businesses. Just make sure your business tenure lines up with the requirements for a specific loan before you apply. Otherwise, you’ll be wasting everyone’s time.
3. Insufficient Credit Score
Your credit score is a key element of your track record because it’s a distillation of financial factors such as how promptly you pay off debt and how often you make minimum payments. It’s no surprise that lenders want to review these factors. They’ll even include a credit requirement with most of their loan products, letting you know up front whether your score makes the grade.
Never apply for a loan that requires a credit score above your own, as there are always other financing options for you to pursue.
4. Unimpressive Business Plan
Lenders want to know how, when, and where you’ll be spending their money. By putting together a compelling business plan, you can answer all those questions and demonstrate your strategic abilities.
Going back to the earlier analogy, imagine if someone asked to borrow your boat but offered no clues as to where they’d be taking it or when they’d be bringing it back. You’d never agree to such an ambiguous request.
5. Insufficient Collateral
Even the most capable entrepreneurs may encounter situations that prevent them from fulfilling their obligations. Lenders usually protect themselves from this risk by requiring collateral, which is an asset they could take possession of in the case of a default. If you’re unable to provide a suitable asset, such as a home or vehicle, lenders find it more difficult to grant your request.
6. Industry Risks
Industries such as restaurants, construction, and farming are known for their unpredictability, so lenders are understandably more likely to get nervous about loans directed toward these industries. You can mitigate this effect by ensuring your business plan and application are top-notch. Regardless, you still may find yourself turned down. If this occurs, consider funding from the Small Business Administration (SBA), as it’s earmarked for entrepreneurs who have been denied loans from other avenues.
7. Debt Utilization Dangers
No loan is an island, so expect lenders to look at your other financial obligations. If you have a healthy amount of credit available and are only using a moderate amount, that puts you in the safety zone. It shows you have responsibly borrowed money in the past and know how to handle the repayments.
On the other hand, if you’re currently maxing out your available credit, the potential strain from making so many payments could scare away lenders.
If your application suffers from one or more of these issues, it stands a fair chance of getting torpedoed. The important thing to remember is that there are loan products designed for just about every situation imaginable. If you’re denied a specific loan, simply use it as an opportunity to review your business and make yourself more impressive on the next attempt. With this attitude, you’ll always be improving. And you’ll eventually have the financing to show for it.