Was your last business loan application rejected? Find out why
Expanding a new business can be incredibly challenging for anyone. Securing financing for the company for all first-time business owners can be frustrating too. Accessing business capital has always been a struggle for small business owners. In 2017, only about 40% of business owners in the US applied for business loans. That numbers are down from 2016 considerably. Experts cite the bleak rate of loan approval for the steep decline in the number of businesses applying for small business loans. According to a Federal Survey in 2017, lenders approved only 45% of the SBA loan applications.
The rates of approval always vary by the loan type. For example – equipment loan has an average 82% approval rate, and merchant cash advances have a typical 79% approval rate. Ironically, SBA loans came into existence because small businesses found it difficult to find financing from the private banks and financial institutions. As a result, more business owners are turning towards secured personal loans for funding their businesses. Although these loans are easier to obtain as compared to business loans, they come with higher costs in terms of interest rates and collaterals.
Business loans are always the smarter option for all budding entrepreneurs and established business owners in the US. If you are in need of funding for the expansion of your operations, buying new equipment or inventory, or hiring new employees, you should always check out commercial lending options. If you have already faced rejection from several potential lenders in the last few months, you need to explore the possible reasons for denial. Unless you find out what factors led to the rejection of your current application, you will never be able to work on the next request that gets approval.
Assessing your previous loan applications on your own can be difficult, so here we are with some of the typical reasons for the rejection of a business loan application –
Not paying enough attention to credit scores
You need a clear understanding of your credit score. A poor credit record is one of the top reasons for credit associations to turn down loan applications. Of all applicants, close to 45% did not know about the existence of their business credit score. More than 72% of the entrepreneurs do not know how to check their business credit profiles. Additionally, over 80% of the American business owners have no idea how to interpret their FICO scores.
If you are about to apply for a loan, check your credit score via FICO, Equifax or a similar online portal. A low score means you should take some time before the application to work on it. Low credit scores represent a slim chance of getting a business loan. Poor credit profiles always attract higher interest rates, irrespective of the loan amount. Visit the Liberty Lending US official website to find out more about the interpretation of credit scores.
Not enough cash flow
Another leading reason for rejection is the lack of enough proceeds. Lenders want to ensure that a borrower has enough cash flow to cover the cost of the loan. Unless you can furnish proof of your ability to pay the monthly installments, you will have a difficult time convincing the lenders about your eligibility. If your expenses are significantly more than the business proceeds, you are giving your potential lenders enough reason to reject your application.
The unavailability of collateral
Sometimes, lenders need to see business equipment, real estate, and other tangible assets before dolling out the money. The physical property can act as a payment guarantee aka collateral. Without enough collateral, a new business that has not yet broken even might face considerable challenges securing capital. The security ensures the lending parties that even when the company fails to make regular payments, the lender can seize the assets and resale them to recoup the loan amount. Some business owners use personal assets as collateral. However, you should speak with finance experts and your attorney before taking that risk.
The presence of previous, unpaid, debt
It is quite normal for businesses to take out multiple loans. Your organization might already have existing loans in the form of merchant cash advances, revolving lines of credit and short-term credits from private vendors. Every bank and lending institution runs background checks on applying business owners. So, if you have previous unpaid loans in your profile, banks might have a tough time believing that you can manage multiple payments at the same time. It might work to consolidate the existing loans. However, we suggest speaking with an expert before you go ahead with another loan while juggling multiple ones.
The business plan is not foolproof
The SBA and banks check the business plans of applicants of business loans. If you want a sure shot at the fund, you need to strengthen your business plan. Your business strategy should reflect considerable market research, realistic expectations, an alternative approach for sourcing proceeds, and it should show that you know your customers. Most online businesses do not have a substantial real estate or equipment they can offer as collateral. In such cases, the bank relies on the profitability of their business plan to consider their loan applications.
The leading lending associations also insist that all applicants prepare their personal resume, income tax returns, bank statements, and legal documents before the approach the lender of their choice. The selection of lenders will also influence your success rate.
- Who is this potential lender?
- Does this lender entertain companies similar to yours?
- What is the approval rate of this lender for small businesses or start-ups?
- What are the set qualifying criteria for this lender?
- Do you meet all the requirements of eligibility?
- Have you received a rejection from this lender before? If so, what were the reasons?
If the reasons for applying for a commercial loan are not strong enough, then you will face high probabilities of rejection. For example – paying off existing loans or redecorating your existing office while your business is not seeing enough cash flow might be enough to warrant rejections from your potential lenders. Denials can hurt your credit score. So be very careful while approaching any party for opening a new line of credit.