Factors That Keep You from Getting a Small Business Loan

Business loans can be essential for starting up or expanding a business. It allows you to have funds that help you to buy new equipment, rent your office or retail space, secure your inventory, hire employees and even help you cover a load of other expenses. However, getting a business loan can be difficult for a lot of new companies, so we’re here to break down why you might be having trouble getting that business loan to start up your dreams.

Poor Credit Score

One of the most common reasons for your business loan rejection is when the lender deems your credit score to be “too low.” However, the magic number can differ depending on the lender and the situation. Many people forget, but your personal credit score factors into a small business loan, even if your company has been around for a while. The logic is, if you can’t handle your own personal credit, then how can you handle paying back a business loan?

If a low credit score is a reason why you are turned down for a loan, then take the time to review your score and take steps towards improving it. Also, have a look at what goes into your personal and business credit score, so you know how you’re being evaluated. The more you know – the more prepared you can be!

Not Enough Strong Cash Flow

Lenders look at cash flow first when they’re deciding to approve a small business loan. They want to know that you can have enough cash flow to pay back your loan, but also have enough for a cushion if you need it. However, if your cash flow is looking spotty or you have seasonal slumps, then that can be a red flag. If they can see that you have numerous negative days each month, then they won’t feel confident in giving you a loan either.

Poor cash flow is a major cause of business failure, so if your application was rejected because of this then you might need to look at your cash management skills. Find an accounting software that enables you to easily generate cash flow reports and projections. This allows you to monitor your cash flow weekly, so you can stay on top of it.

History of Defaults

If you or your business has a history of defaults from other loans or lines of credit, then lenders will be more hesitant in extending any additional credit to you. You want to make sure that you pay down your loans and maintain low balances on any of your lines of credit. Also, if you have too many active loans then the lender wonders if they are able to get their money back. This is a business to them, so they need to know that you can repay your loan. Otherwise, it’s too risky for them to help you.

Be diligent, if you can’t afford to pay off your debts early, then negotiate. You want to be smart with your money, so ask about a lower interest rate. Many credit card companies have this scheme, so if you can get your hands on it then you can pay the balance off faster without all of the interest tacked on.

You Have A New Business

Listen, it’s not your fault that your business is too new, but you can’t blame lenders for being skeptical at first. Lenders want to be able to look at your cash flow and business history to get a sense of your future business capabilities. If your business lacks the experience and years for them to set realistic expectations, then they will lack the confidence to give you a loan.

If you want to make sure that you qualify for a small business loan then check out Qualification Criteria. This is especially important if you’re a new business because there is a lot of criteria that you need to meet in order to receive your loan. Being a young business is hard and it can be daunting when you want to apply for a loan, so making sure that you have everything you need is the best first step to take.

Insufficient Collateral

For many lenders, they want a guarantee before they take the risk of giving you a loan. They want to make sure their investment is protected if you fail to make the necessary payments. That’s why if you don’t have adequate collateral then your application could be rejected.

You want to keep in mind that vehicles, homes, property, equipment, and more can all be used as collateral. Those are your belongings, so it’s up to you if you’re willing to risk it for this loan. You can use our Business Loan Calculator to see how much you will need to loan. Then check the value of your collateral. This will help you see if you have enough collateral available.

Also, here’s a top tip; if your lender requires collateral from you, then your small business loan application won’t stand a chance without it.

Open Judgment

A judgment is issued by a court of law. When you borrow money, you are legally bound and required to repay the debt. This can include opening a credit card account, getting a line of credit, and financing a big purchase. You can also be in debt to service providers like utility companies, medical professionals, cell phone service providers, and mechanic shops. They all provide you a service, bill you, and then you pay them back. However, if you’ve failed to pay any of these businesses back then you can have a judgment opened against you. You will then be required to go to court, so they can collect their money.

When applying for a small business loan, a lender will be hesitant to loan you any money if you are in this situation. If you are being summoned to court to pay off another debt then they will be wondering if this will happen to them. It’s a lot of work and hassle to take someone to court, so if they can avoid that by not giving you a loan then they will.

Conclusion

In order to have a successful business, you have to be prepared for the setbacks. Not receiving your small business loan, the first time you apply is just one of those challenges, but you can overcome it. Think smarter and really do your research on what you need in order to receive your loan. We have many useful resources on our website to help you get that small business loan. Check out our pre-qualification tool or just send us a message. We’re here to help you bring your business to life.