Small businesses are notorious for one thing – having a small budget. Without the capital and resources that medium and large enterprises have, sometimes the need to borrow funds is necessary to keep the operation afloat. From needing start-up funds to applying for cash to cover operational expenses, there are a lot of reasons that small business loans might be a lifeline. The only problem is, many find it difficult to get approved. If you’ve tried applying for a loan but have been turned down, here are a few reasons why that might happen and steps you can take to improve your chances.
- No Credit or Bad Credit
One of the main reasons small business owners are turned away for loans is having no credit or bad credit. As with any credit or lending product, your creditworthiness is determined by your credit history. Lenders look to this to determine if you’re capable and likely to repay the money lent to you. Since most companies offering small business loans look at your personal and professional credit history, there are a lot of things that could cause them to decline your application.
New businesses, for instance, don’t have any credit. If your personal credit is poor or nonexistent, lenders have no way of judging your creditworthiness and consider this a risk. Businesses who have a credit history, but may have filed bankruptcy in the past or have other outstanding debt, their creditworthiness is equally ruined and they’re labeled a risk.
Tip: Before applying for a small business loan, do a review of your personal and professional credit history. If there are accounts you can clean up or pay off, do so to improve your chances of being approved.
- Not Enough Cash Flow
Another thing lenders use to determine your ability to repay your loan is your cash flow. They need to know that you have the financial means to repay the balance lent to you. Again, new enterprises won’t have much cash flow – especially if they’re looking for startup funds. This will work against them in that there is not enough money coming in each month to cover the cost of the loan as well as other business expenses. To an established company, adequate cash flow is an essential factor because they have more expenses than money coming in.
Tip: There are a lot of ways to fix cash flow problems. Start by cutting back on any unnecessary spending by creating a budget. Next, you should establish and commit to an invoicing system. Assess late fees, communicate often, and have a strategy for collecting on outstanding balances.
- You Don’t Have Any Collateral
Since most small businesses are considered high-risk clients, lenders are reluctant to shell out thousands of dollars without some kind of physical asset that can be liquidated if you fail to repay the loan. This lessens the risk for lenders and, should you default, minimizes their loss.
Tip: Though your business may not own anything of value, you may. If you’re willing, you can create a list of assets you have personally that you wouldn’t mind putting up for collateral against the loan. This could be real estate or equipment.
- You’ve Got Too Much Debt
If you’re an established business with fairly good credit, reasonable amounts of cash coming in, and collateral to offer, but you’ve still been turned down for a loan, it could be because you have too much debt. Lenders look at your other business and personal expenses to discern whether you can pay for the loan. If they find that most of your revenue has to be put towards paying down additional debt, they will be less likely to lend you the money.
Tip: The idea here is to eliminate or consolidate your debt. By reducing the amount of debt you have or at the very least, lowering your monthly payments, you can free up more money which can improve your chances of being approved.
When applying for small business loans, remember that it is your responsibility to prove to lenders that you can afford to repay the loan responsibly. Having a good credit score, something to offer as collateral, a healthy cash flow, and minimal debt, all help to reduce the risks to lenders, making them more likely to give you their stamp of approval.
