Let’s face it: rejection sucks, and in the world of business, lender saying no to your application can be one of the haunting events that you could experience.
To get your loan declined when you need it the most is disappointing at most but this doesn’t necessarily mean it’s impossible to get financing.
If you’re suffering from the same dilemma, the first thing to do is to figure out your next move and to help you avoid getting the same result, we have compiled a list of mistakes you have to watch out.
Poor credit score
Before applying for any loan, it is best to know the status of your credit. Especially when getting a business loan, a good credit report is crucial to prove your credibility to pay back. CreditRepairCompanies emphasized that knowing the impact of your credit score to your loan application is important in the process.
And although your business’s finance is thriving, there are many factors that can affect a credit report — your payment patterns, the number of your current debts, length of credit history and types of current credit.
For some lenders as well, your personal credit score plays a big part in your application. So before you start, reach out to credit report companies like Equifax, Experian TransUnion and get a copy of your credit report. Once you have your credit score in hand, do your best to improve it. Next, scrutinize every written record included in the report. If you noticed incorrect information, you can reach out to your credit report provider or your credit agency.
Also, consider checking credit repair company to remove negative items that are hurting your credit score.
Sloppy and incomplete paperworks
Having all the paperwork beforehand makes all the difference when applying for a loan. Especially when asking for a business loan, you have to organize properly your financial documentation to make a good impression.
Make sure that your records are up-to-date and presentable. This will boost the chances of your application as it can serve as proof that you are prepared and determined.
Ahead is a list of things you should submit so your application will push through.
- Name of business
- Business income tax returns
- Business licenses
- Personal and business bank statements
- Financial statements such as balance sheet, cash flow statements, shareholder equity
- Financial projections
- List of executive officers and their background
- Legal structure
- Business credit report
Having no business plan
If you’re looking for a fund to jumpstart your business, it is crucial that you present a detailed business plan. It is a surefire way to prove that you have goals, ambition and business’ target market that are already mapped out, and don’t worry, a business plan doesn’t need to be formal and long. It’s best to keep it short and straightforward.
The most important factor is that you include how you will plan to pay the loan. It will instill confidence to your lenders that you’re not merely taking the loan to fund a business that has no plan and no potential to grow.
When applying for a business loan, you need to indicate how the money will be used. Lenders want to see that you know exactly what your needs are and how this loan will meet those needs.
You can work with a financial adviser to map out your business operation and financial growth.
Being in a risky and excluded industry
Most traditional lenders avoid catering to risky businesses. Even if you have excellent credit, enough experience in business and stellar profit, your business still might struggle to qualify for a loan if it’s part of a high-risk industry.
So what do lenders consider a high-risk industry?
In general, a risky industry is defined as someone dependent on revenue, regulations, and technology. Restaurant, gambling and newspaper businesses are some of the examples of what might include in this classification.
Aside from this, there are industries that are ineligible for loans, specifically for SBA loans. This includes but not limited to lobbying organizations, any types of franchises and certain types of health businesses.
However, don’t let this discourage you, there are still other lenders that may be willing to support your situation.
Having inconsistencies and lies in your application
It is understandable that you want to impress your lender with your application, but being dishonest in your loan application can be more damaging than being completely real.
Remember that every lender will do a thorough fact-check on your business. To save yourself some trouble, be forthcoming of your financial situation and business plan. It will also help you to truly find the most suitable loan that can help you boost your business.
Applying for a lot of loans
The more entries, the more chances of winning? Unfortunately, it doesn’t stay true when applying for a loan. Quite the opposite actually, applying for a lot of loans can actually hurt your chances of getting any of them because here’s the deal — each time your credit report is pulled, it takes a small hit. The best thing to do is to apply strategically to loans you actually want and can qualify for.
Having existing debt
Having multiple debts at a time could affect your chances in getting a loan, but why exactly? So if you are using too much of your credit line, it will mean you are overextending your finances. And lenders might worry that you won’t be able to pay them back.
Repaying a huge number of debts can also put your business in strain. Instead, reduce your financial obligations beforehand and make your credit history presentable and decent.
Lack of cash flow
Cash flow is the lifeblood of any business. It is also usually the first thing lenders look at when gauging the status of your business. Most lenders also use a debt to income ratio to see if you can handle the payments upon approval of your loan.
So here’s the thing — before you apply for any loan, you must have a thriving cash flow to support your loan payment. Having enough cash flow will also ensure that your business’ finance can handle the additional cost of debt.
If you have trouble having a cash flow that can manage all payments, most lenders will almost certainly end up rejecting your application.
Having no collateral
Most banks prefer loans that are backed up by collateral. Especially if applying for a small business loan, you may have to provide collateral to support the loan. Collateral is an asset, ranging from real estate, equipment or inventory that can be seized and sold by the lender, in case of default or bankruptcy.
If you have enough collateral in the line, most lenders may be willing to accommodate your application.
Applying to a lender that has rejected you before
Save yourself some time and frustration and don’t make the mistake of applying to a lender that has rejected you before. Chances are, they’ll deny your application again, especially if there is no significant shift in your finance.
The best thing to do is apply somewhere. There are still many lenders out there that may not share the same opinion to your application. All you have to do is find the right one that has the most suitable eligibility requirements.
Not having enough time in the business
Being new in the market can also affect your chances of getting a loan. This means that you don’t have enough credit history to qualify for a loan, even for a small business loan. You might have a hard time qualifying for business loans if you don’t have a strong credit in the first place.
However, you just need to find the right lender for your situation. Even if you haven’t been operating very long, there will always be a lender that will help you. Remember that there is a ton of options when applying for a loan.
But if you are aiming for a larger financing aid, you can take out a smaller loan and maintain consistent payments. This will build your business’s credit for the future.
Not exploring your options
Before you start applying for loans, it is crucial that you know what you need. It is important to note that loan comes in all kinds of forms and terms. You have to familiarize yourself with what kinds of loans that might be available for your situation.
If you’re jump-starting a business, you have to explore the option of getting a small business loan. This kind of loan is granted to aspiring entrepreneurs to help them start or expand a business.
You can consult a financial advisor to figure out what kind of loans you should get.
Unstable business management
Typically, lenders value the financial stability of their clients. However, some also assess the consistency of business management. Before you apply for a loan, make sure that there are no major changes such as modification in your business structure or shift in your target market. Lenders like a business growth that they can vouch for in the future.
Bottom line
Remember, it’s not impossible to get financing. With the proper planning and stellar confidence to your application, you could definitely score a loan that is favorable to your situation. Hopefully, knowing the mistakes you should avoid can help your chances of getting that loan approved.
