When you’re about to grace a job interview, you make sure your resume is polished, you practice speaking clearly, and you’ll dress to impress. These preparatory rituals are important because you’re unlikely to get hired if you don’t come to the process prepared.
The same analogy goes for a business loan application. Applying for a loan is almost similar to applying for a job. You’re going to flex some great prepping skills to your application. But, no matter how prepared you think you are, things just don’t go according to plan. Your business loan application was denied. You reapplied, but history only repeats itself. You get denied for the nth time.
Fortunately, you can prevent the same pitfall from happening again. Take your cue from these common reasons why business loan application gets rejected, and take heed not to make the same mistakes.
Poor Credit Score
A poor credit score is one of the primary reasons why your loan application is rejected. When the lender deems your credit score to be “too low,” it will be difficult for you to qualify. Credit Score Trends will depend on different situations and vary among lenders.
Know it that your personal credit score will influence your business loan application, no matter if your business has been operating for a while. The logic goes, if you can’t even manage your personal credit, how is it going to be different with a business loan? The lender will need an assurance that you’re capable of repaying it.
Now if a poor credit score is a reason why your loan was disapproved, evaluate your score and fix potential errors that are dragging it down. It will be a good move to brush up on what goes into your business and personal credit score too. It will help you understand how a lender evaluates a loan application.
If you have a less than desirable credit score, it’s best to improve it first before applying for a loan.
Your Debt Utilization Ratio is Not High Enough or Too High
As a rule-of-thumb, lenders will want you to utilize no more than 30 percent of your total credit. If you happen to use too much credit, the lenders will consider you as overextended, and that you’re not capable of paying them back on time.
For instance, you have a $200,000 worth of line of credit but have already used $190,000 of it. You’re automatically considered as high risk. On the flip side, if you lack a history of using credit responsibly or don’t have any debt, it will count against you. The key here is to balance the two.
Be sure to monitor your total credit limits, including personal credit cards, business credit cards, lines of credit, and other credit sources. You also need to maintain a sensible debt usage.
You Have a Weak Cash Flow
One of the first things that lenders look at when deciding whether to approve your business loan application is your cash flow.
The lenders will want to know if your cash flow is sufficient enough to cover your business expenditures, repay the loan, and to provide a cushion for emergency expenses. If you regularly experience seasonal slumps or have a spotty cash flow, it’s a red flag for the lenders.
Moreover, poor cash flow is the main culprit of business failure. If such is the reason why your loan application was denied, you might need to evaluate your financial management skills.
You can use accounting software that helps you create projections and cash flow reports easily. The next thing to do is monitor your cash flow every week to stay on top of it. Also, be committed about collecting due payments from customers and don’t let invoices drag out.
Your Business is Still Young
If a business is still new, it’s yet to build a robust credit history to qualify for a business loan.
There are cases wherein vendors don’t always report your payments to the business credit agencies. With that, make sure your new vendor or supplier will report your payments whenever you set up an account with them so your business can build up a good credit history.
Of course, it’s possible to have solid financials and very successful business even if you’ve just started. You just have to look for the right lender for your situation. Some lenders will require older business than others, so explore your options before applying for business credit.
Your Industry is Too Risky
There are industries that traditional lenders simply considered as “risky.” For example, restaurants are risky to venture because of their high failure rate.
You may also face other hurdles to getting a loan if your business operates in certain vice industries like gambling. If it’s the reason why you get rejected, search for lenders who specialize in your industry. Surely, there are lenders for different niches.
You Collateral Isn’t Enough
The majority of traditional lenders will require collateral for a business loan qualification. If you lack the right type of collateral or don’t have one at all, your loan application will likely get denied.
If you’re stuck in this situation, you can go for alternative options such as unsecured loans. These loans don’t require collateral, so you have a better chance of qualifying.
Your Reasons for Getting a Loan are Not Feasible
What are your reasons for applying for a business loan? Is it because you want to buy an expensive office space filled with unnecessary business assets like an Apple Watches for all of your employees and cozy playroom where you can huddle during break time?
Sure, all of them sound great, but a lender won’t qualify your loan for those reasons. They need to make sure that you’ll use the money to grow your business so you can repay them.
Sound reasoning for a business loan should be financing equipment, reasonable real estate purchase, advertising, covering seasonal sale variance, or long-term software and product development.
Getting denied for a business loan is almost a rite of passage for many business owners and entrepreneurs. But that doesn’t mean it’s a trend to tolerate. By being conscious and taking steps to avoid the reasons mentioned above, you’ll have better chances of getting approved in your first, or next loan application.