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When a lender turns down your small business loan application, it can be overwhelming. Yet, if you are in this situation, you are far from alone.
There are nearly 32 million small businesses in the United States. In 2020, 63% of those companies did not apply for financing because they feared a lender would deny their request, according to data from the Federal Reserve. Many companies that applied for funding (after March of the same year) were either refused (30%) or were only eligible for a portion of the funds they requested (26%).
A lender can decline your business loan application for a number of reasons, but you can educate yourself about these red flags ahead of time. Once you understand why lenders turn down small business loan applications, you can work to overcome these issues ahead of time.
Here are five problems that could prevent you from getting a small business loan.
1. Bad business credit
One of the most important factors a lender can consider when applying for a small business loan is your credit rating and credit report. A survey by the National Small Business Association found that 20% of small business owners who turned down funding received turnouts because of a low credit score.
Your trade credit details tell lenders how your business has handled credit obligations in the past and whether you are likely to pay your debts on time in the future. It is wise to review your business credit reports before applying for a small business loan to make sure they are on the best possible terms. If you don’t like what you find, you can make plans to create business credit in the future.
2. Bad personal credit
Small businesses are often closely linked to their owners. Therefore, it’s understandable that a lender would want to review the way you manage your personal credit to get a feel for how your business might handle its credit obligations. A Goldman Sachs survey found that 70% of small business owners said their personal credit score was a big factor when they applied for business financing.
A low personal credit score can be fatal for some business loan applications. You may qualify for a bad credit business loan, but be prepared to pay higher interest rates and fees. In the long run, your best bet is to work on improving your credit for the future.
3. Insufficient time in business
The time you have spent in business can also play a role in your company’s ability to secure a business loan. As a new business, you could be at a disadvantage for two reasons.
- You may not have had enough time to build good business credit.
- Some lenders will only give loans if you’ve been in business for at least six months to two years.
In general, it is easier for an established business to obtain funding than for a startup. But if you need to apply for credit for a newer business, you still have options to consider.
There are many business start-up loans available. Just be sure to pay attention to the loan requirements, especially where time in business is concerned. You want to avoid applying for small business loans that you are not eligible to receive due to the age of your business.
4. Cash flow limits
Limited or inconsistent cash flow can be a red flag when applying for a small business loan. Without sufficient cash, your business could struggle to keep up with the monthly payments of new debt.
If you are having cash flow difficulties, one area you may want to take a look at is your billing process. Make sure you have a system in place to send invoices immediately, as soon as the products or services are delivered to your customers. You can also consider implementing late payment fees for slow payers, or more consistent follow-up procedures for invoices that are past their due dates.
5. Missing documents or information
Applying for a business loan can be tedious. When you add the mountain of paperwork that some lenders need, you can start to get a lot of frustration.
Yet banks and lenders are asking for these details for a reason. Each piece of information and document helps the lender assess your level of risk and determine if lending money to your business is a good investment. It is essential to allow time to go through your loan application line by line and then recheck the details when you are done.
No matter how long it takes, you should research and provide all the tax returns, bank statements, business licenses, and other documents that the lender wants to see. If you make an effort to follow through on every request, you may be able to remove the barriers that prevent you from qualifying.
Alternatives to business loans
Business credit cards
If you can’t get a traditional business loan, you may be able to secure additional capital for your business with a business credit card. But first, here are a few things to consider before getting a business credit card:
Depending on your situation, a business credit card might not be the perfect alternative to a small business loan. But it can still be a useful tool to have in your business credit arsenal, even alongside other financing options.
If you don’t mind the prospect of extensive research and paperwork, you may be able to get some free money for your business. Small business grants can give your business the financing it needs without any repayment requirements.
You can find lists of available grants from the federal government, state government, and other institutions online. Here are some examples.
- Grants.gov. A useful resource if you are interested in granting opportunities offered by the federal government.
- EDA.gov. A directory of state and regional grants and government contracts available through the United States Economic Development Administration.
Grants are an attractive source of funding, but securing them can be difficult. To qualify, you will need to find programs that are right for your business. Then you have to beat all the other eligible applicants to get the funding. However, if you are successful, grants can provide your business with an influx of money without having to worry about having to repay those funds.
Promising start-ups, especially those with the potential to disrupt an established industry, may be able to attract investors. These investors (i.e. venture capitalists, angel investors, etc.) agree to fund a business in exchange for a share of the stock.
With investors, your business does not have to repay the funding like it would pay off a loan or other debt. However, the investor may want to own a percentage of the business or receive royalties in return for the investment he makes. Make sure you are comfortable selling part of your business and accepting feedback from your new partners before going ahead with this fundraising approach.
Frequently Asked Questions (FAQ)
What Credit Score Do You Need For A Small Business Loan?
Credit scores affect your ability to qualify for small business loans and help lenders understand your risk as a potential borrower. It is common to see a minimum personal credit score requirement of at least 680 for better loan terms. In comparison, bad credit business loans can be achieved with a minimum score of 530.
Despite the importance of your credit scores during the loan application process, the business loan requirements of each lender vary. A lender will determine the level of credit risk they are comfortable with and establish their approval criteria based on that decision.
What’s the easiest small business loan to get?
There is no such thing as a universally easy small business loan. Still, if you are trying to weigh different business loan options to find the best fit, the table below provides some interesting information.
Whatever type of financing you are looking for, the key to qualifying is finding a loan offer with approval criteria that your business can meet. For example, if you have bad credit, you don’t want to apply for a business loan that requires good or excellent credit. Likewise, if your business has only been in business for six months, you should avoid loans that require a longer period of operation.
Is it difficult to get a business loan?
Getting a business loan can sometimes be difficult. In 2020, 37% of small businesses applied for funding. Of these applicants, 76% received some funding, but only 37% qualified for the full amount they requested.
If you want to improve your chances of getting approved, it is wise to understand the steps for getting a business loan before you apply for financing. From there, make sure your credit is in good shape, research the best loan option for your situation, review the eligibility requirements, and find the best deal.
Obtaining a good small business loan can take a lot of effort. Yet, in the end, your hard work could pay off with the financing you need to help your business grow, buy equipment, or solve cash flow issues. The right business loan can be a lifeline or a stepping stone to further success.