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8 Reasons Why Your Business Loan Was Rejected
Securing a business loan or funding for your small business can be incredibly frustrating, particularly for first-time business owners who don't know the principles.
In fact, in its Spring 2015 small business survey, Nav found that despite having more business financing choices available, such as online creditors, it's still an uphill battle for small business owners to gain capital. If this wasn't bad enough, the increasing quantity of financing options now available could actually be making things worse for small business owners. The survey found that of those who had been denied funding, 45 percent was turned down more than once, and 23 percent didn't even understand why their applications had been denied.
To clear thing-up, here are eight common reasons why your business loan was rejected, and how to make certain that won't happen again.
1. Failure to comprehend your credit score.
The Small Business American Dream Gap Report that has been mentioned above, discovered that one of main reasons why a small business loan is turned down because the proprietor weren't mindful of their credit score. In reality, 45 percent of the entrepreneurs surveyed weren't even aware they had a business credit rating. Additionally, 72 percent did not know where to locate information concerning the credit rating. Much more troubling, if they did, over than eight in 10 small business owners confessed they didn't understand how to translate their score.
Being aware of your credit score before applying for financing will inform you in the event that you have bad, or no, credit at all. If that's the case, you can be certain that your loan application will be denied because you are too too much risk.
You'll be able to check your credit score through companies like Experian, Dun & Bradstreet, FICO, and Equifax.
The good news is that following your review your score, it's possible to either fix or build your own credit by making timely payments, keeping your debts low, preventing opening too many lines of credit, and keeping existing credit report open.
2. Inadequate cash flow.
Lenders also should make sure you are capable of repaying your loan every month, on-top of having the ability to cover rent, payroll, inventory, and other expenditures. Thus, if you're spending more money each month then what's coming, then you want to address that cash flow problem.
The easiest approaches to fix any cash flow problems is to invoice promptly, instituted overdue penalties, have an emergency fund, and cut unnecessary expenses.
3. Limited security.
Lenders typically aren't willing to risk lending money to companies without some kind of guarantee of reimbursement. In other words, they need physical property they can take if a loan isn't repaid. Produce a collateral document that lists everything you can put-up as collateral. You can incorporate both business and personal assets because your business might not have the real estate or equipment to offer as collateral. If that's the scenario, you may have to offer your house or car as collateral.
4. You are an early stage startup.
I'm a huge'Shark Tank' enthusiast but it's created this fantasy that business owners can walk-up into an investor having only an idea and get the funding they need. The reality is that lenders want to see a track record, healthy earnings, and some experience in the market.
That is not to mention that it is entirely out-of-the-question to receive funding to your early-stage startup. You may have to seek alternative sources like crowdfunding, online lenders, grants, or small business loans from the authorities.
5. You currently have too much money.
If you or your organization is already buried in debt from various other loans or lines of credit, lenders will most likely be hesitant in extending any extra credit for you.
Make sure that you pay down loans and keep low balances on any lines of credit that you have. If you can't manage to payoff your debts as early, then negotiate together. Most credit card companies, as an instance, will provide you a lower rate of interest, which means you may pay off that balance faster without all of that interest tacked-on.
6. You do not have a good business plan.
Without a good business strategy, investors likely will not consider your loan application. To make sure you loan is approved after it has been submitted, make sure that you have an updated and comprehensive business plan that shows that you have conducted research, demonstrates that you know your customers (or at least potential clients), includes a very clear mission statement with goals set up, and has a calculated estimate of sales and profit projections.
The Small Business Administration also proposes that besides your small business plan, ensure that you have accumulated and prepared your personal history, resume, income tax returns, financial statements, bank statements, and legal records such as articles of incorporation.
7. Your reasons for seeking a lengthy do not make sense.
Why do you need a loan? Is it because you would like to purchase a lavish office full of unnecessary company assets like an exotic fish tank and Apple Watch's for each one of your employees?
That sounds fantastic, but a lender is not likely to issue you a loan for all those reasons. They would like to be certain loan will be used to grow your business so you can pay them back.
Instead, your reasoning to get a loan needs to a reasonable real estate buy, financing essential equipment, long-term software and product development, advertising, or covering seasonal purchase variance.
8. The exterior requirements are too risky.
There are also times when outside conditions can influence the creditor's decision. By way of instance, if you want to enlarge your food delivery service, but you will find either rising fuel or food costs, a creditor might consider the loan too risky because those soaring prices may make it harder for you to turn-a-profit.
Ensure that you do your assignments and keep-up with business trends. If you realize that there will be outside influences which will sabotage you might need to apply for financing at a later time or search for other loans.