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5 Problems Keeping You From Getting A Small Business Loan – Forbes Advisor

5 Problems Keeping You From Getting A Small Business Loan
Written by Publishing Team

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When a lender rejects your application for a small business loan, it can be frustrating. However, if you are in this situation, you are far from alone.

There are approximately 32 million small businesses in the United States. In 2020, 63% of these companies did not apply for financing because they feared a lender would reject their application, according to Federal Reserve data. Many companies that sought financing (after March of the same year) were rejected (30%) or were only eligible for a portion of the funds they requested (26%).

A lender can decline your business loan application for a number of reasons, but you can recognize these lender red flags beforehand. Once you understand why lenders are rejecting small business loan applications, you can work around any of these issues up front.

Here are five problems that may prevent you from getting a small business loan.

1. Bad credit business

One of the most important factors a lender may consider when applying for a small business loan is the business credit score and credit report. A survey conducted by the National Small Business Association revealed that 20% of small business owners who declined financing received a rejection due to a low credit score.

Your business credit details tell lenders how your business has managed credit obligations in the past and whether you are likely to pay the debt on time in the future. It is wise to review your business credit reports before applying for a small business loan to ensure that they are in the best possible condition. You can make plans to build business credit going forward if you don’t like what you find.

2. Bad credit personal

Small businesses are often closely related to their owners. Therefore, it is understandable that the lender may want to review how you manage your personal credit to get an idea of ​​how your business handles its credit obligations. A Goldman Sachs survey found that 70% of small business owners said their personal credit score was an important factor when they applied for business financing.

A low personal credit score can be a deal killer for some business loan applications. You may qualify for a bad credit business loan, but be prepared to pay higher interest rates and fees. In the long run, your best bet is to work on improving your credit for the future.

3. Insufficient time at work

The amount of time you have spent working can also play a role in your company’s ability to obtain a business loan. As a new company, you may be at a disadvantage for two reasons.

  • You may not have enough time to establish good business credit.
  • Some lenders will only issue loans if you have been in business for at least six months to two years.

In general, it is easier for an established company to get funding than for a startup. But if you need to get credit for a new business, you still have options to consider.

There are many business loans for startup available. Just be sure to pay attention to loan requirements – especially when it comes to time on the job. You want to avoid applying for small business loans that you do not qualify for because of the age of your company.

4. Cash Flow Constraints

Limited or inconsistent cash flow can be a red flag when applying for a small business loan. Without adequate cash flow, your business may have trouble keeping up with the monthly payments for new debt.

If you are struggling with cash flow, one area you may want to consider is your billing process. Ensure that you have a system in place to send invoices instantly as soon as products or services are delivered to your customers. You may also want to consider applying late payment fees for slow payers, or more consistent follow-up for bills that are past their due dates.

5. Missing documents or information

Business loan applications can be tedious. When you add to the mountain of paperwork that some lenders require, you may start to get frustrated.

However, banks and lenders ask for these details for a reason. Every piece of information and document helps the lender assess your level of risk and decide if lending money to your business is a sound investment. It’s important to take the time to go through your loan application line by line, and then double-check the details when you’re done.

No matter how long it takes, you need to track and file every tax return, bank statement, business license and other documents a lender wants to see. If you make an effort to follow through on each application, you may be able to remove obstacles that prevent you from qualifying.

Business loan alternatives

Many people think of business loans first when they need to secure business financing. However, there are alternative ways to access capital for your business as well if you do not meet the requirements of a business loan.

Business credit cards

If you can’t get a traditional business loan, you may be able to secure additional capital for your business with a business credit card. But first, here are some things you should keep in mind before you get a business credit card:

Depending on your situation, a business credit card may not be the ideal alternative to a small business loan. But it can still be a useful tool in your business credit arsenal, even along with other financing options.

business grants

If the prospect of extensive research and paperwork doesn’t bother you, you may be able to secure free money for your business. Small business grants can give your company the financing it needs without any repayment requirements.

You can find lists of available grants from the federal and state government and other institutions online. Here are some examples.

  • Grants.gov. A useful resource if you are interested in grant opportunities offered by the Federal Government.
  • EDA.gov. The Directory of State and Regional Grants and Government Contracts is available through the US Department of Economic Development.

Grants are an attractive source of funding, but securing them can be difficult. To qualify, you will need to select the right programs for your business. Next, you need to beat any other eligible applicants to secure funding. However, if successful, grants can provide your business with a cash flow without the worry of having to pay back that money.

Investors

Promising startups, especially those with the potential to disrupt an established industry, may be able to attract investors. These investors (for example, venture capitalists, angel investors, etc.) agree to finance a company in return for a portion of the action.

With investors, your business will not have to pay off financing as if it were paying off a loan or other debt. However, an investor may want to own a percentage of the company or receive royalties as a trade-off for the investment they make. Make sure you are comfortable selling a portion of your business and accepting input from your new partners before moving forward with this financing approach.

Frequently asked questions (FAQs)

What credit score do you need for a small business loan?

Credit scores affect your ability to qualify for small business loans and help lenders understand your risks as a potential borrower. It is common to see a minimum personal credit score requirement of at least 680 for more favorable loan terms. For comparison, bad credit business loans can be obtained with a minimum score of 530.

Although your credit score is important during the loan application process, each lender’s business loan requirements vary. The lender will determine the level of credit risk they are comfortable with and will set their approval criteria accordingly.

What is the easiest small business loan to get?

There is no easy small business loan in the world. However, if you are trying to balance different business loan options to find the best solution, the chart below provides interesting insights.

No matter what type of financing you seek, the key to qualifying is finding a loan offer with approval criteria that your business can meet. For example, if you have bad credit, you do not want to apply for a business loan that requires a good or excellent credit score. Likewise, if your company is only in operation for six months, you should avoid loans that require a longer operating time.

Is it difficult to get a business loan?

Getting a business loan can sometimes be difficult. In 2020, 37% of small businesses applied for financing. Of those applicants, 76% have received some funding, but only 37% are eligible for the full amount they requested.

If you want to improve your odds of approval, it is wise to understand the steps for obtaining a business loan before applying for financing. From there, make sure your credit is in good shape, select the best loan option for your situation, review eligibility requirements, and shop for the best offer.

It can take a lot of effort to qualify for a good small business loan. However, in the end, your hard work can pay off with the financing you need to help your business expand, purchase equipment, or solve cash flow challenges. The right business loan can be a lifeline or stepping stone to further success.


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