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. However, this doesn’t mean you won’t get any funding at all. It means you’ll have to look outside conventional lenders, for example, grants, online lenders, small business loans offered by the government, and crowdfunding.

5. Existing debt

All debt isn’t bad; however, excessive debt may hinder lenders from extending a loan to your business. This is because they feel you may not be able to repay the money. In fact, lenders want to see a debt-to-income ratio of below 30%.

Anything above this figure will deter interest from the lender. Many startups find themselves in this situation after taking on loans from several sources during their initial phases. This comes back to haunt them when applying for a loan at a conventional bank.

Therefore, it’s in your best interest to pay off existing debts and maintain a low DTI by checking your personal and business credit cards. You can also negotiate with the credit card companies to allow you to pay off the loan at a lower interest rate, allowing you to clear the debt faster.

6. Improper paperwork

This is also one of the leading reasons why lenders turn down loan applications. It’s also the most painful because business owners spend over 20 hours trying to make sure they get everything right, only to be denied in the end.

Some of the documents lenders require include bank account statements, personal and business tax returns going as far back as 3 years, and a business plan. The latter is important to woo investors to open their wallets.

Therefore, it’s crucial to ensure you have a detailed business plan which demonstrates how you intend to grow your business, its mission, it’s target audience, and its sales projections.

7. Unfavorable economic conditions

Your business may have the necessary collateral, a stellar credit, a convincing business plan, and meet all other parameters to qualify for a loan. However, prevailing economic conditions also play a huge role in determining whether the lender will approve your application or not.

For example, a restaurant business may suffer from rejection due to high food prices, which may make pose a danger to its profit margin and, ultimately, its ability to repay a loan.

There’s also the risk factor associated with certain industries such as gambling. Some lenders may decline the invitation to extend credit to such businesses. However, it’s up to you to find lenders who deal with your industry; they do exist.

Alternative options

When a bank and other lenders turn down your application, it doesn’t mean all doors close on you. There are plenty of alternative funding sources you can consider.

• *Friends and family – Many businesses started with the help of friends and family. What’s more, this type of loan comes with low-interest rates or none at all. However, you must take care of the relationship by putting all agreements on paper to avoid problems in the future.
• *Crowdfunding – This is a new form of sourcing for capital and involves pitching your idea to investors via an internet platform. If they like your idea, they’ll chip in.
• *Merchant cash advances – This option allows you to take a cash advance through purchasing a certain amount of future debit/credit card sales. The merchants will then deduct a certain percentage from your sales instead of fixed monthly installments until you clear the whole amount.

It’s always painful to know a lender turned down your loan application. However, you can use this opportunity to learn more about the reason leading to rejection. This will help you prepare for a subsequent application.