“I need a loan but keep getting declined!” This is a typical lament of a frustrated business loan applicant and rightly so as there are more denials than approvals. In reality, though, getting a small business loan can be difficult or a breeze, depending on why and how much you need, how you are preparing and who you are approaching.[wpsm_column size=”one-half”] [wpsm_titlebox title=”Table of Contents” style=”1″][contents h2 ][/wpsm_titlebox] [/wpsm_column]
All lenders try to assess your capability to repay the business loan. Based on the information you’ve provided; they try to draw a profile. Any discrepancy in the profile for a lack of information, misinformation, or a mismatch will result in a declination of the loan approval. Let’s find out why our loan applications get declined.
You didn’t handle the process correctly
The papers you submit with the loan application provides basic information about you. Your balance sheets or profit and loss statements tell about the present state of your business and the business plan you are going to present will speak about the future of your business. Any missing information will render the profile incomplete and might result in dismissal of the application.
Bad (or no) credit
The credit score of your business shows how efficiently you have repaid past loans. If your business is new and has no credit score then your personal credit score will be taken into account. Poor credit history on the business as well as the personal front will lead to loan declination.[also-recommended-box title=”” href_title=”How To Open a Business Bank Account with Bad Credit?” rel=”/blog/how-to-open-a-business-bank-account-with-bad-credit//” type=”3″] Recommended Reading for You: [/also-recommended-box]
Time in business
The time over which your company is in the market is directly related to the recognition and goodwill it has generated. The lender will evaluate your market reputation and take it into account while processing your loan. You will find it more difficult though to get a loan if you are a new venture or a start-up. Having said that, even if you are just starting your business, and even if your start-up has bad credit, you can still get a start-up loan with bad credit.
No lender would like to lend money to an underperformer because, if you don’t earn then repaying the loan will be difficult. Your business needs to earn a minimum annual revenue to be qualified for a loan. In most cases, this amount is set by the lender and will vary according to the lender and the loan type.
High debt-to-income ratio
The balance sheets of the company not only tell about the cash flow but also about the debt, and how they are being managed. The debt to income ratio is an important measure as it compares the debt to your earnings. Business concerns with a large amount of debt or high debt -to-income ratio are less likely to qualify for a loan.
Lack of collateral
Collateral is an asset against which you can raise a loan. Most lenders favour collateral as it offers them security, as failure to repay the loan would mean that the lender can acquire the collateral. If you have an asset, it will be easier to get a loan using it.
A poor cash flow would mean delayed or missed payments which in turn will affect the credit rating of the company. No lender would like to provide a loan to an applicant having a cash crunch. We encourage you to learn a few Cash flow Strategies for Your Struggling Small Business.
Industries like accounting, agriculture, construction, media, etc. are considered risky by the lenders. This is because they have uncertain and inconsistent income and are influenced by many external factors like legislation, natural forces, technological breakthrough, etc. Your lender will know the nature of your industry from your business licenses and registrations and if you’re in the risky category then you might not get a loan.
Your Business Plan Is not impressive
You must explain to the lender the purpose of the loan through a proposal. An important part of this business proposal is the projected financial statements, that explains the increase in revenue in the proposed business plan. You need to impress or satisfy the lender with the projections to get your loan approved.[also-recommended-box title=”” href_title=”How To Write a Business Plan in 8 Easy Steps?” rel=”/blog/how-to-write-a-business-plan-in-8-easy-steps/” type=”3″] Recommended Reading for You: [/also-recommended-box]
You applied for a loan that doesn’t match your business
Lenders don’t allow using the funds for other purposes than stated in the application. There are different types of loans catering to different needs and lenders don’t approve a mismatch in the loan type and the purpose. For example, you cannot apply for a business term loan intended for acquiring real estate to pay off your debts on existing loans. Similarly, lenders would disqualify an application for a business line of credit if you project to buy equipment with it.[also-recommended-box title=”” href_title=”How to Find the Best Small Business Line of Credit?” rel=”/blog/how-to-find-the-best-small-business-line-of-credit/” type=”3″] Recommended Reading for You: [/also-recommended-box]
Negative event or error on the credit report
The lenders verify the information submitted along with the loan application. Any error, suppression of facts, or any unexplained negative event in your credit report may lead to the cancellation of your loan application.
What to Do If Your Small Business Loan Application Is Declined?
If your small business loan application gets declined, don’t lose hope. Here are some points that will help you to review your application, make the necessary changes, and reapply.
Assess your debt and income
A careful assessment of your debt and earnings will not only help you to know how much money is there at hand but also to calculate the exact amount of loan you’ll need.
Examine your credit reports
Reviewing your credit report will help you to find out hidden errors that might affect your score. Also, check if the report is up to date before submitting it. Remember your credit report is vital to the lenders.
Fix errors in your credit reports
You can fix errors in your credit report. Consider the following steps –
- Keep a record of all your business dealings in written communication.
- Get a reputed agency to get your credit report other than the lender.
- Look for errors however small it might be.
- In case of multiple errors don’t address all of them in one letter.
- Gather as much evidence as you can in your favor and send them with your dispute letter.
Talk to Your Lender
It always pays to talk to your lender in case of a dispute. Remember though that pointing out an error or accepting it won’t improve your score but correcting it on the report will.
If you are new in business or a startup, then go for loans like a business line of credit. You might have to settle for smaller amounts or a shorter-term but it will get you in the habit of repaying regularly and in the process crank up your credit rating. This will be profitable in the long run. An easy way to build credit is to purchase from vendors that report to commercial credit agencies. These vendors paly a big role when you are applying for business financing. Vendor credit is when vendors allow you to “buy now, pay later”, and if you pay on time these vendors will help you to build your company’s credit score.
Identify assets that you can use as collateral. Getting a loan against collateral is much easier. You also can use collateral to get loans on terms favorable to your business.
An increase in the earnings will levitate your application to the lender. Take a deep look at your existing business and look for ways to earn more. A definite way is to streamline and curtail the costs.
Pay down debt
Lenders don’t like debt and it is also bad for your earnings. You need to pay off your debt or at least have a solid plan on how to pay them off when you apply for a loan.
Get a co-signer
If your credit score is low then you can bring in a partner with a high credit rating. This might help you get the loan you need but it also might mean that you have to compromise with your position and hold over the company.
Shop around for your loan. You also need to look beyond banks, Government organizations, and other traditional lenders for a loan. There’s a whole new breed of ‘online lenders’ who are offering a variety of finance options for all your needs. They offer more customization, online and faster processing of applications, and more convenience in loan disbursal than traditional lenders. You can also avail of a loan with minimal credit rating with these lenders. Talk to them and share your requirement – you might get more than what you are looking for.
Getting approval for a loan is not tough, but at the same time, people get declined. It all depends on planning and following the proper steps. Assess yourself thoroughly, review your papers and information, shop around, and apply to the lender who you think might be right for you.
What do I do if my SBA loan is denied?
Remember that SBA requires meticulous paperwork and stringent norms. They also have a longer processing time. You can reorganize and reapply. You can also look at other alternatives like online lenders.
Why do banks reject loan applications?
Banks have been the traditional lenders for years and want to make sure that the applicant will be able to repay the loan. For this, they have strict criteria regarding credit rating, annual income, collateral, and other points and reject applications that don’t match up to their criteria.
What should you do if your lender rejects your loan application?
You can reassess your requirements, review your credit report, and reapply for the loan. Shop around and also look at alternate