Small business loans are denied for a variety of reasons. To minimize risk, traditional lenders have historically used more stringent criteria and lending restrictions. Understanding the red flags that lenders look for is the best way to prevent a small-business loan being rejected. Here are the five most common reasons small business loans are denied. What your business can to do prevent these declines?
1. Poor Credit History
Credit profiles give lenders an insight into how you manage your finances and your payment history. Your FICO score could be affected if you’ve missed payments, defaulted or maxed out credit cards. This may affect the way lenders perceive you as a potential borrower. Other reasons why small business loans are denied include having insufficient credit or a poor credit history. FICO scores over 650 are usually indicative of creditworthy borrowers. FICO suggests simple ways to improve your score.
* Paying off your bills in a timely manner.
* Keeping your credit balances low.
Open only the number of credit cards you plan to use.
Make sure that you know how your credit rating is calculated. A recent survey conducted by Nav found that small business owners who know their credit scores and understand how ratings are calculated when applying for loans have a 40 percent higher chance of getting their loan request approved.
It is important to understand the difference between personal and commercial credit. Business credit is determined by the financial decisions that you make as an owner of a small business. It also serves as a measure of your ability to repay lenders based on past payment history. Your Social Security Number is linked to your personal credit score. Your business credit is tied to your Employer ID Number. Remember that most lenders will check your personal credit rating. Lenders will use your personal score to determine creditworthiness if your business is new and has not yet established credit.
You should check your credit score annually. Each of the three credit bureaus, Experian TransUnion and Equifax, will provide you with a copy of your report for free.
2. Recent Bankruptcy
Insufficient cash flow is a major reason why small business loans are denied. Both individuals and businesses need money to cover the cost of operations and living. Declaring bankruptcy is an official indication that you are unable to repay outstanding debts.
Lenders often reject applications if the applicant has a bankruptcy history, whether it is personal or professional. Small business owners can file for bankruptcy due to a variety of reasons.
Unexpected costs are difficult to absorb.
* Reduction in customer volume and sales
* Inability to pay for services essential to the operation of the business.
The circumstances of an individual or business will determine the type of bankruptcy that is filed. Chapter 7 bankruptcy is usually filed by companies that lack the assets to stay solvent. Chapter 11, a longer process, can result in reorganization so that debts can repaid. Your credit score and eligibility for loans can be affected by the chapter you choose.
A bankruptcy is a red-flag for lenders, but that doesn’t mean you can never borrow again. Alternative lenders that offer bad credit business loan solutions could be the solution. While you wait for your bankruptcy to be removed, you need to immediately improve your credit score. You can improve your credit rating by obtaining a secured card, joining a credit union or finding a cosigner.
3. Inconsistent cash flow
Before approving a loan application, lenders want to make sure that a company has more cash coming in than it is spending. Positive cash flow is the name of this principle. Inconsistent cash flow is a major reason why small business loan applications are denied. The lender is looking to ensure that you can pay your monthly loan repayments.
Lenders may be suspicious if the financial data suggests a negative or fluctuating cash flow. They might think that this could be an indication of future cash flow. Although lenders prefer a consistent cash flow, this may not be possible in all cases. If you provide more than one product or service, make sure to show all your business’s revenue streams. The trend of these sales over time. Unsecured loans are a good option if you’re in a hurry and need money quickly. They can be easier to get from alternative lenders.
4. Short Time in Business
Lenders often base their decisions on past financial performance. A newly-established company is therefore one of the main reasons for small business loans being denied. It is for this reason that it pays to be an individual with a good credit score. This allows lenders to get a quantitative picture of the borrowers’ financial situation. Lack of collateral is another factor that can make it difficult to obtain working capital.
Lenders will also want to know how long the business is likely to survive. According to the latest statistics from SBA, the survival rate of new businesses after a year is approximately 80 percent. This is the highest success rate since 2005.
5. ‘Worry-Worthy’ Industry
Small business loans are often restricted by traditional lenders. If lenders view your industry as unpredictable or risky, they could deny your loan application, regardless of how lucrative your business may be. A lender may label construction as financially unstable due to the industry’s seasonality. Entrepreneur magazine states that outside factors can influence a lender’s decision. When food prices rise, a quick-service restaurant might have difficulty getting a loan because it is harder to make a profit.
Denied for a loan is a disappointment, but it does not mean the end of success. Find out why your loan was denied, and what steps you need to take after the rejection. You can increase your odds of approval by selecting the right lender. Just like lenders make decisions about small business loans, you too must choose the right lender. QuickBridge is proud of its role as a lender that serves small businesses, which are often left behind due to the unrealistic expectations set by name-brand lenders. We are committed to providing the working capital and service that small business owners require to be successful.
QuickBridge can provide funding that is tailored to your specific business needs. Contact us today to find out how we can help your business with fast and efficient funding.
