If you are considering a loan for your small business, it is important to know the reasons why your business may be denied for a loan. This way, you can take the necessary steps before you apply for the loan to ensure that you will be approved. It’s similar to an interview; you want a nice dry-cleaned suit, polished shoes, and updated resume. For a loan, you want attractive credit, clean books, and steady cash flows.
Below are five reasons why banks may be reluctant to approve you for a loan. It is important to make sure these five problems have been addressed before sending out loan applications and hearing a wave of “no’s” from your lenders.
- If you have bad credit
This is the most obvious reason why you could be denied, since it can be the most important factor. There are plenty of profitable and functioning businesses out there that may think that, because they are making money, they have good credit. This is not always the case. Having a few late payments on credit cards, for whatever reason, can hurt your credit and cause a lender to worry if they will receive their payments on time.
From a personal credit standpoint, the two big red flags are being late on mortgage payments and being late on child support payments.
- If your lender has rejected you before
Typically speaking, applying to a lender that has denied you in the past will use that decision as a basis when making future decisions about lending to your company. However, if at least one year has passed since you were denied, and your financial situation has changed (increase in credit score, higher profit levels, etc), you shouldn’t be worried about applying to a lender that has denied you before. Credit standards change relatively frequently, and lenders love to see a company on the right track.
- If your books are sloppy
Lenders only want to lend to companies that they can trust will pay them back. That seems pretty obvious, but earning trust is no small feat. It is important to have clean books that aren’t sloppy, as sloppy books can give the impression of carelessness and a lack of attention to detail. Having books that are easy to understand and organized gives the lender a certain level of confidence that you know what you’re doing and you are organized with your money.
- If your business plan isn’t concrete
Lenders want to know what you plan to use the money for. If it is an equipment loan, then it is pretty obvious what the loan will be used for. If it is a working capital loan, it is important to be able to tell the lender exactly what you want to use the money for and how it will earn you money. If instead, the lender asks you what you want to use the loan for and you have a roundabout plan that doesn’t have any concrete progression, the lender may be nervous. Imagine if you were lending money to someone; would you rather have someone who knows exactly what they want the money for and has a plan to use the loan to make money, or someone who has some plans but isn’t quite sure yet and doesn’t have any quotes or projections of how the loan will make them money?
- If you have big credit payments and less incoming money
Having positive cash flows is something that lenders need to see when considering loaning someone money. If your business has big debt obligations (credit card payments, office expenses, rental installments, etc), but isn’t bringing in enough cash to cover these costs and is dipping into the reserves more and more each month, lenders will have a problem. Lenders want to see that you are making more money than you are spending so that you will be able to pay back a new loan. If you are already cash flow negative, it will be difficult to afford more monthly debt obligations and lenders will be reluctant to lend you money.