7 reasons why banks declined your business loan application

You have the perfect business idea. In fact, you believe it’s the next big thing, but one factor pumps the brakes on your launch: Capital to start the business. For a startup, securing financing to launch your business is frustrating, to say the least. In fact, according to a small business survey conducted in 2015 by Nav revealed that while there may be numerous financing options, landing capital from the lenders is still difficult.

In the same survey was even more shocking news. It hurts when you fail to secure funding the first time, but it’s devastating when lenders turn you down the second time. This is what happened to 45 percent of business owners.

To make matters worse, 23 percent of the respondents said they weren’t given a reason why their applications were rejected.

As a business owner, it’s important to know what affects your loan application so you can have a better shot at securing the necessary funding.

1. Poor credit score

In a report prepared by the Small Business American Dream Gap, one of the main reasons why small businesses fail to secure funding is because the owner didn’t have a clue about their credit score. Not their personal score, but their business credit score.

According to the report, the figure stood at 45%. In addition, another 72% said they didn’t know where or how to find this credit information. Even more shocking is over 80% of small business owners who access their scores admitted to not knowing how to interpret it.

Similar to how a personal score will affect your $5,000 personal loan application, a business credit score will allow you to understand the amount you can qualify for and the interest rate.

If you don’t know where to start, then Equifax, FICO, Experian, Dun and Bradstreet are great places to check your score. After checking, you’ll know whether you’re a risky borrower or not. If you are, then you have a chance of repairing your credit.

This you can do by making on-time payments, maintaining old credit accounts, and avoiding large debts.

2. Little collateral

Many conventional lenders require you to put up some form of collateral in order to approve your loan application. This way, they have a fallback plan in the event you fail to repay the loan.

If you don’t put up collateral or the assets included don’t match the amount you want to take out, then prepare for rejection. To avoid this, take the time to prepare a collateral document. This is a document which lists all assets you can put up as security.

They may include business equipment, business or personal assets, etc., like your car or home.

3. Poor cashflow

According to Investopedia, cashflow is the net amount of cash and cash equivalent being transferred into and out of a business. Lenders will look at your cashflow to determine whether your business generates enough money to cover business expenses and the loan if approved.

If your business doesn’t have a strong cashflow, then lenders view you as too risky and will turn down your application. Therefore, it’s important to resolve any cashflow problems by:

*Invoicing promptly
*Instituting late fees
*Creating an emergency fund
*Cutting down unnecessary expenses

4. You’re a startup

If you’re new in the game, chances are you’ll not receive the funding you require. This is because you don’t have an operating history, thus no credit history to qualify your business for a loan. This is why lenders will prefer big businesses over your startup.

They want to see strong revenues, an authority in the market, and above al,l a track record.