This is What Could be Stopping You From Getting a Small Business Loan
Business loans can help launch or expand a business. These funds can be used to purchase inventory and/or equipment, lease operational space, and cover payroll or other expenses. Unfortunately, it’s often difficult for new businesses to get this type of funding.
In this blog, we’ll explain the top 8 things that could be stopping you from getting a small business loan.
8 Reasons You Can’t Get a Small Business Loan
Poor Credit History
One of the tools that lenders use to determine the credibility of a borrower is a credit report. If your credit report reflects that you don’t always pay back your debts, your application may be rejected. Unfortunately, some people have credit issues for reasons that are beyond their control and this blocks them from qualifying for a small business loan.
If your credit score is under 700, it can be difficult to qualify for a small business loan. If this is the case, you need to work on fixing it if possible. Start by checking your business and personal credit scores to ensure they are accurate. If you do find errors, make sure to address them before applying for funding. Each of the credit reporting agencies (Experian, Equifax, and TransUnion) allow you to request a free copy of your credit report every year. If you’re checking your business credit score, you’ll use Dun & Bradstreet, Equifax, and Experian. You should also build a strong personal credit score and reduce debt before applying for business funding.
Most loans do require a down payment of 0% to 20%, based on your financial history and the collateral you put up for the loan.
You may want to consider nontraditional financing if your credit score is still too low to qualify for traditional options.
Limited Cash Flow
Another factor that lenders typically look at is your cash flow. Cash flow is the cash you have available to pay back a loan and indicates the health of your business. Most lenders can’t afford to overlook insufficient cash flow.
One way to avoid cash flow issues is to calculate it at least once a quarter. This can help you optimize your cash flow before you begin applying for funding.
To determine the amount you can afford to pay each month, you’ll need to divide your net operating income by your total annual debt. This will give you a debt service coverage ratio. If your cash flow is the same as your monthly loan payments, your ratio will be 1. While this is acceptable, most lenders prefer a ratio of 1.35 which shows you have some wiggle room in your finances.
No Solid Business Plan
Lenders are much more likely to approve your application if you have a plan than if you are spontaneous. They want to know that you have a plan for your business. While it’s normal for small businesses to lack a formal business plan, it’s still necessary to put in some effort and create a plan before you approach a lender.
A business plan will include the following:
- Company Summary
- Market research
If you’re not sure your plan is adequate, you may want to work with a business plan expert to review it and offer feedback. You’ll also need to be ready to explain how you plan to use the funds that you are borrowing.
You must at least be prepared to explain why you need the loan and how you plan to pay it back.
Too Many Loan Applications
Some business owners apply for multiple loans at one time so they can choose from several offers. However, this is a red flag for the credit bureaus.
Before you approach a lender, you need to make sure you have all of your paperwork and information available. This includes:
- Detailed business plan
- Proof of collateral
- Financial records
- Income tax returns
- Bank statements
- Loan history
- Balance sheet
- Franchise agreements
- Business License
You can turn to the SBA for a detailed checklist of things you need to apply for a business loan. By using this, you reduce your chances of looking unorganized/unprepared.
Additionally, it’s important to keep personal and business financials separate. If you mix the two, you reduce your chances of being approved for financing. Therefore, take the time to gather the required information, fill out forms, and check over your application before you submit it.
Not Seeking Expert Advice
When you approach a lender, they want to see that you’ve gotten advice from knowledgeable advisors. Accountants are a good place to start. You can also work with SCORE, which is a free mentoring service supported by the SBA. SCORE is a group of retired businesspeople who have experience in the industry. They can help you find the best solutions for your financial needs.
You may also consider reaching out to your regional or local Women’s Business Center or Veteran’s Business Outreach Center.
Not Shopping Around
Since finding a lender can be hard, you may be tempted to sign up with the first one you find. However, it’s important to take the time to investigate your options to find the one that best suits your business.
The best place to start is the financial institutions in the community where you plan to run your business. Consider starting with a credit union or community bank, as they are more invested in the community and often have programs that can help new local businesses.
The SBA offers backing for some businesses to receive loans, which can be helpful if you’re not able to find a traditional lender for your business. Other alternatives include online lending platforms, friends/relatives, and peer-to-peer lending sites.
As you do your research, you may also request that each lender provide you with the APR of their loan offer.
The last reason that many small business owners are unable to obtain funding is that they are apathetic. They are unable to show why they are a good candidate for funding. In addition to stating your case, you must also show faith and enthusiasm to encourage the lender to believe in you. This means you must have a compelling story to tell the lender.
The more prepared, passionate, and serious you are, the greater your chances of being approved.
Business loans are hard to come by. There are so many factors considered. However, these 8 roadblocks are typically what is stopping you from getting the funds you need. Once you address these, it should be easy. If you need help with business funding, contact Skogen Capital Lending today.