For business owners, it’s a terrifying situation: You were going to get that business loan, but the bank turned it down.
Over the past few months, several small business CEOs have struggled to get their business loan applications approved and have asked for help.
Sharita Humphrey is an award-winning finance expert and financial mentor. She recently addressed this issue as a content partner of SCORE. I’m sharing this to help CEOs assess their next step after being turned down for a loan.
There are several reasons why applications for business loan financing are rejected. Here is a list of the top four reasons your business loan might be refused. If you plan to apply for a loan in the near future (or if your application has already been turned down), you can use this list to avoid facing future application rejections.
Your credit history provides lenders with insight into your payment history and how you manage your finances in general. If you’ve ever defaulted on loans, have multiple missed payments, or have maxed out your credit cards, it could lower your FICO score. This, in turn, can affect how lenders view you as a potential borrower. Other reasons why business loans are rejected include not having enough credit or having little or no credit history.
Typically, creditworthy borrowers are those with FICO scores above 670. FICO recommends a few simple ways to improve your score:
- Pay your bills on time.
- Regularly check your credit report for errors and dispute them immediately.
- Pay off your debts.
2. Incomplete / invalid documents / documents
Unfortunately, one of the most common reasons why business finance applications are rejected is due to incomplete or invalid documents and documents.
The applicant may not have completed the application correctly or provided all the necessary supporting documents.
Among the documents required by most lenders are bank statements, tax returns, proof of business registration, business licenses and permits, financial statements, employer identification number (EIN ) and your personal and professional credit reports. They may also ask you to submit other documents related to your business, such as leases, contracts, permits, licenses, and business documents.
To avoid any problems, be sure to put your papers in order before submitting your application. Then be sure to check everything. Also, don’t forget to carefully review each step of your loan application to make sure you complete it correctly.
Most traditional lenders require that you provide sufficient collateral before you can get a business loan. If you don’t have enough collateral, or if you post the wrong kind of collateral, there’s a good chance you won’t be approved for financing a business. Warranties can take various forms, such as an automobile, a house, heavy equipment, etc.
You might be thinking, “But I can’t afford to buy professional gear without a loan in the first place!” Unfortunately, it’s the reality: chances are you won’t be able to get approved for a loan because you don’t have enough valuable assets. If this is your case, try looking for another source of funding, such as an unsecured loan.
4. You are a new business
If you’ve just started your business, you may not have enough credit history to qualify for business financing. Remember: suppliers don’t always automatically report your payments to business credit bureaus. So, whenever you create an account with a new vendor or vendor, make sure they report your payments. This will help your business build a good credit history.
Of course, it is entirely possible for you to have strong finances and run a successful business even if you have not been in business for a long time. But to get the financing you need, you may need to look a little bit deeper into the right lender for your situation.
Dean Swanson is a Certified SCORE Volunteer Mentor and Past SCORE Section President, District Director and Regional Vice President for the Northwest Region.