It can be disheartening when a lender declines your request for a small business loan. However, if you are in this circumstance, you are not alone.
Nearly 32 million small enterprises operate in the United States. According to data from the Federal Reserve, in 2020, 63% of these businesses did not seek for funding out of fear that their request would be denied. Many enterprises that sought funding (after March of the same year) were either denied (30%) or qualified for only a portion of the required capital (26%).
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A lender may decline your application for a business loan for a variety of reasons, but you can learn about these lender red flags in advance. Once you comprehend the reasons why lenders decline loan applications for small businesses, you may endeavor to circumvent such obstacles in advance. Listed below are five issues that could prevent you from obtaining a small business loan.
Bad Business Credit
When you ask for a loan for your small business, a potential lender will look at your business's credit score as well as its credit record. This is one of the most crucial aspects the lender may evaluate. According to the findings of a survey conducted by the National Association of Small Business Owners (NASBO), twenty percent of the owners of small businesses that were denied funding did so because of their poor credit scores.
Lenders will evaluate your company's credit history to determine how well it has met its credit obligations in the past and whether or not they believe you will continue to pay your debts on time in the future. Before applying for a small business loan, it is a good idea to check that your company's credit reports are in the greatest shape they can be in order to maximize your chances of being approved. If you don't like what you uncover, you can make preparations for establishing your company's credit moving forward.
Bad Personal Credit
The proprietors of small firms frequently have a tight relationship with their companies. As a result, it is easy to comprehend why a lender would wish to investigate the manner in which you handle your personal credit in order to obtain a sense of the manner in which your company might handle its credit responsibilities. According to findings from a survey conducted by Goldman Sachs, seventy percent of owners of small businesses reported that their personal credit score was a significant consideration when they asked for business funding.
If you are applying for some types of company loans, having a poor personal credit score could be a deal breaker. If you have poor credit, you may still be able to apply for a loan for your business; however, you should be prepared to pay significantly higher interest rates and costs. Working on boosting your credit for the future is your greatest bet in the long term, so make it a priority.
Inadequate Time in Business
The length of time that your company has been in operation might also have an impact on its capacity to obtain a commercial loan for its growing organization. You can be at a disadvantage as a result of the fact that your company is relatively new.
- It's possible that you didn't have enough time to develop a solid credit history for your company.
To qualify for a loan from some financial institutions, your company must have been operational for at least six months and up to two years.
- When compared to new businesses, those that have been around for a while typically have an easier time securing finance. You do, however, still have choices to consider if you need to apply for financing for a firm that is quite new.
There is a wide variety of funding options for new businesses just getting started. It is imperative that you pay close attention to the conditions of the loan, particularly those that pertain to your length of time in business. It is in your best interest to steer clear of submitting applications for small business loans that you cannot be considered for because of the age of your firm.
Limited cash flow
When applying for a loan for a small business, having a limited cash flow or one that is erratic can be a red signal. If your company does not have a significant amount of cash flow, it may have difficulty meeting the monthly obligations associated with additional debt.
If you are having problems with your cash flow, one area that you may want to look into is the way in which you are billing your customers. Make sure that you have a process in place to immediately send out bills to your consumers as soon as the products or services they have ordered have been delivered. You should also think about the possibility of charging late payment fines to customers who are slow to make payments, or developing more regular follow-up procedures for bills whose due dates have passed.
Documents and Data Not Present
The application process for business loans can be time-consuming. It's possible that you'll start to feel a lot of frustration after you factor in the mountain of paperwork that certain lenders require.
However, banks and other lenders have a valid justification for requesting this information. Each piece of information and document assists the lender in evaluating the level of risk associated with lending money to your firm and determining whether or not it would be a good investment to do so. It is essential that you schedule time in your schedule to go through your loan application item by item, and after you are finished, you should check all of the particulars twice.
You are responsible for locating every tax return, bank statement, company license, and other document that the lender requests to see and providing it to them, regardless of how much time this may take. If you are willing to put in the work to fulfill each and every requirement, it is possible that you will be able to overcome the barriers that are preventing you from qualifying.
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