Trying to secure a small business loan can be an incredibly frustrating experience. You optimistically submitted all that was required, only to find that you’ve been declined – again. Whether you need funds for start-up costs or capital to support business growth, having to wait for business funding approval can have devastating consequences.
If securing financing has been a struggle for you, consider the following reasons why your loan application might have been rejected:
- Credit Score
If you have a bad credit score, it sends the wrong message to a lender. Poor credit is typically seen as one of two things: either the applicant doesn’t take debt obligations seriously, or he or she takes too many risks. If your business is a small business, matters will be even more complicated. The credit evaluation will extend beyond your business’ walls and into your personal life. If your business credit is good and it pays all its bills on time, you could still be rejected because of a bad personal credit history. The best decision you can make for you and your business is to regularly monitor your credit score, and dispute any inaccuracies you find.
When applying for a small business loan, many applicants fail to provide the necessary documentation. Unlike working with an alternative lender like First American Merchant (which requires minimal documentation and financials), banks want to see sufficient documentation in two crucial areas: cash flow and a business plan. Banks want to see proof of earnings, a realistic projection of future earnings, how you address the competition and what sets your business apart, among many other things.
- Cash Flow
As they say, “cash is king”. Lenders want to make sure you are capable of repaying your loan each month. After you’ve paid rent, purchased inventory, covered payroll and other day-to-day expenses, do you still have enough cash to pay them too? If more money is going out of your business each month than what it has coming in, you’ll likely be denied funding. To avoid this problem, you’ll need strong cash flow management. Stay on top of accounts receivables, have an emergency fund and cut all unnecessary expenses.
When applying for a small business loan, lenders will want to have some promise of reimbursement before they extend the capital you need. For example, if you fail to repay the loan, they’ll want physical property instead. Create a collateral document to give to the lender. Make sure you include everything you are willing to list as collateral; this can include both business and personal assets (e.g. home, car, real estate, equipment).
- Business Startup
In the eyes of a traditional lender, startups are simply too risky. They have no financial or credit history to prove they can withstand the struggles a new business will encounter. For this reason, many startups turn to alternative lenders like FAM, which specialize in working with business startups. There, entrepreneurs can secure flexible business funding, safe payment processing and startup merchant accounts. Avoiding banks altogether.
Banks will always be hesitant to extend additional credit to the business or entrepreneur already struggling with debt from other loans or lines of credit. To them, it is a sign that you are incapable of properly managing money, or the business has a cash flow problem. Pay down loans and maintain low balances on lines of credit. Whenever possible, negotiate with credit card companies for a lower interest rate; this will allow you to pay the balance off faster, without the overwhelming interest.
- Business Plan
As mentioned above, a solid business plan is key to securing a business loan. Lenders simply won’t consider your application if you have not submitted an updated, thorough business plan. They want to see that you’ve done your research, you know your customers (or potential clients) and you have a clear mission and goals in place.
By following the above tips, you will greatly improve your chances of securing a small business loan. Above all, make sure you do your homework. If your application is still declined, don’t despair. It might be time for you to consider what an alternative lender, like FAM, can do for you. You might be surprised to find that their options are more suited to your business’ needs.
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