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When a lender refuses your request for a small business loan, it can be frustrating. However, if you are in this situation, you are not alone.
There are nearly 32 million small businesses in the United States. In 2020, 63% of these companies did not apply for funding because they feared a lender would reject their application, according to the Federal Reserve. Many companies that applied for funding (after March of the same year) refused (30%) or met the requirements for only a part of the funds they requested (26%).
A lender may refuse your business loan application for a variety of reasons, but you can find out about these red flags of the lender in advance. Once you understand why lenders are refusing small business loan applications, you can work on overcoming any such issues in advance.
Here are five key pointers in moving forward with a small business loan.
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1. Bad business credit
One of the most important factors that a lender can consider when applying for a small business loan is the credit score of your business and the credit report. A survey by the National Small Business Association found that 20% of small business owners turned down funding for refusal due to low credit scores.
Your business credit records tell lenders how your business handled its credit obligations in the past and whether it is possible to pay off your debts on time in the future. It is wise to look at your business credit reports before applying for a small business loan to make sure they are in the best possible condition. You can make plans to build business credit going forward if you do not like what you find.
2. Bad personal credit
Small businesses are often closely associated with their owners. Therefore, it is understandable that a lender may want to look at how you manage your personal credit to get an idea of how your business can handle its credit obligations. A Goldman Sachs survey found that 70% of small business owners said their personal credit score was a significant factor when applying for business financing.
A low personal credit score can be disastrous for some business loan applications. You may be able to qualify for a business loan for bad credit, but be prepared to pay higher interest rates and commissions. In the long run, your best bet is to work on improving your credit for the future.
3. Insufficient time in business
The time you work can also play a role in your company’s ability to secure a business loan. As a newer business, you could be at a disadvantage for two reasons.
- You may not have had enough time to build good business credit.
- Some lenders will not issue loans unless you have been working for at least six months to two years.
In general, it is easier for a well-established business to secure financing than for a startup. But if you have to look for credit for a newer company, you still have options to consider.
There are many business start-up loans available. Just be sure to pay attention to the loan requirements – especially when it comes to business time. You want to avoid applying for small business loans that you are not eligible for due to the age of your company.
4. Cash flow restrictions
Restricted or inconsistent cash flow may be a red flag when applying for a small business loan. Without adequate cash flow, your business may have trouble keeping up with the monthly debt payments.
If you are having problems with cash flow, one area you may want to consider is the billing process. Make sure you have a system for sending invoices immediately, once your products or services are delivered to your customers. You may also want to consider late payment fees for late payers or more consistent tracking procedures for invoices that exceed their due dates.
5. Missing documents or information
Business loan applications can be tedious. When you add to the mountain of bureaucracy that some lenders require, you can start to feel very frustrated.
However, banks and lenders are asking for these details for a reason. Every piece of information and paperwork helps the lender assess your level of risk and determine if lending money to your company is a good investment. It is crucial that you take the time to read the loan application line by line and then check the details again when you are done.
Regardless of the time it takes, you should locate and provide any tax returns, bank copy, business license and other documents that the lender wants to see. If you make an effort to respond to every request, you may be able to remove the obstacles that prevent you from qualifying.
Business loan alternatives
Many people think of business loans first when they need to secure business financing. However, there are alternative ways to access capital for your business if you do not meet the requirements for a business loan.
Business credit cards
If you can not get a traditional business loan, you may be able to get extra capital for your business with a business credit card. But first, here are some things to keep in mind before getting a business credit card:
Depending on your situation, a business credit card may not be the perfect alternative to a small business loan. However, it can be a useful tool that you can have in your business credit arsenal, even along with other financing options.
If the prospect of extensive research and bureaucracy does not bother you, you may be able to secure free money for your business. Small business grants can give your company the funding it needs without any repayment requirements.
You can find lists of available grants from the federal government, state government and other institutions online. Here are some examples.
- Grants.gov. A useful resource if you are interested in grant opportunities offered by the federal government.
- EDA.gov. A list of state and regional grants and government contracts available through the US Economic Development Administration.
Grants are an attractive source of funding, but they can be difficult to secure. To qualify, you need to find programs that are right for your business. Next, you need to beat any other eligible applicants to secure funding. However, if you succeed, grants can offer your business a cash flow without worrying that you will ever have to repay that money.
Promising start-ups, especially those that have the potential to disrupt an established industry, may be able to attract investors. These investors (ie venture capitalists, angel investors, etc.) agree to finance a business in exchange for part of the action.
With investors, your business does not have to repay the financing as it would repay a loan or other debt. However, the investor may want to own a stake in the business or obtain royalties as a compromise on the investment. Make sure you feel comfortable selling a part of your business and accepting information from your new partners before embarking on this financing approach.
Frequently Asked Questions (FAQ)
What credit score do you need for a small business loan?
Credit scores affect your ability to qualify for small business loans and help lenders understand the risk you face as a potential borrower. It is common to see a minimum personal credit rating of at least 680 for more favorable loan terms. Bad credit business loans, by comparison, can be achieved with a minimum score of 530.
Regardless of the importance of your credit score during the loan application process, the business loan requirements of each lender vary. A lender will determine the level of credit risk it can assume and will determine its approval criteria in accordance with this decision.
What is the easiest loan for a small business?
There is no one-size-fits-all loan for small businesses. However, if you are trying to weigh different business loan options to find the best solution, the chart below provides some interesting information.
Regardless of the type of financing you are looking for, the key to qualifying is to find a loan offer with approval criteria that your business can meet. For example, if you have bad credit, you do not want to apply for a business loan that requires a good or excellent credit score. Likewise, if your company only runs for six months, you should avoid loans that require longer operating time.
Is it difficult to get a business loan?
Getting a business loan can sometimes be difficult. In 2020, 37% of small businesses applied for funding. Of these applicants, 76% received some funding, but only 37% met the requirements for the full amount they requested.
If you want to improve your chances of getting approved, it is wise to understand the steps to get a business loan before applying for funding. From there, make sure your credit is in good standing, find the best loan option for your case, check the eligibility requirements and shop for the best offer.
It may take a considerable amount of effort to qualify for a good small business loan. However, in the end, your hard work could pay off with the financing you need to help your business expand, purchase equipment, or meet cash flow challenges. The right business loan can be a lifeline or a springboard for further success.