Applying for a business loan could ultimately give you the money that your business needs to move forward with plans for expansion, product development or something else, but the process of applying for the funding you need is often overwhelming. Some unfortunate individuals will go through weeks of loan processing and underwriting only to learn that their loan request was declined. By understanding what some of the top reasons for a denial are, you may be able to make better decisions about your financing.
You Do Not Have Collateral
Most traditional banks require borrowers to have collateral to obtain a loan or a line of credit. This collateral may be equipment, inventory, real estate, vehicles or other assets of value. Typically, they need to be owned free and clear, but you may not have these assets or they may already have a lien tied to them. The bank also may not lend on the current value of the property, and they may discount some value for depreciation. This means that they may not value the collateral that you do have as highly as you would value it.
Your Credit Rating is Insufficient
Each bank has a unique credit rating requirement that they are looking for when making a lending decision, and if your credit rating is below their threshold by even a single point, your loan request may be declined. Keep in mind that the bank typically will pull a credit report at the beginning of the loan process as well as immediately before closing to ensure that your credit profile has not changed during the process.
Your Business Income is Lacking
One of the criteria that banks will review when making a lending decision is your business income. They need to see ample cash flow to cover your current debts and bills as well as the new loan payment. If your business income is lacking or unstable, your loan request could be declined.
Your Expenses Are Too High
Even when your income is stellar and stable, your loan request may be declined if your debt ratio is too high. The debt ratio is calculated based on your monthly debt obligations divided by your stable monthly income. You may already have numerous financial obligations, and these may be too considerable for the underwriter to be comfortable with.
You Have Limited Business Experience
If your business is a start-up, there is a good chance that your loan request will be declined. Most traditional banks want to see at least two to three years of stable operating history before they will extend a loan. Likewise, they will want to see that you have established business credit and that you have bank statements that document your income and expenses.
You Do Not Have a Reasonable Business Plan
A business plan can be detailed or rather limited, but it should make sense. At a minimum, it should include projections for financial statements such as a balance sheet, a profit and loss statement and other related documents. The plan should be feasible and should make sense, and it should show that your business has a fighting chance of succeeding.
Your Options When You Are Declined
Your loan request may have already been declined, or perhaps you have not yet applied and are afraid that a traditional bank will not approve your loan request. While these are common reasons for a traditional bank to decline a loan, alternative funding sources are available that may be more comfortable extending a loan to you if you are facing one or more of these circumstances today.
If you’d like to know more about how we can help you get money for your business, call us for a FREE Business Funding Consultation at (800)416-7713.
Rick Anderson @FundingExpert1
Rick Anderson is the CEO and Senior Small Business Funding Specialist with Small Business Money Solutions. A company that helps small business owners and self employed professionals get the financial solutions they need to GROW and thrive. Rick has been in business for over 22 years, and his company has helped 22,485+ small business owners and counting. Rick has also written a book on small business finance entitled 10 Easiest New Money Sources For Business Owners.
Connect with him https://www.linkedin.com/in/RickAndersonSmallBusinessLoans or if you would like to ask him a question, send it to [email protected] If you’d like a FREE ‘Business Funding’ Consultation, call him at (800)416-7713.