25 May Top 5 Reasons Why Small Business Loans Get Denied
There are several reasons why small business loans get denied. Traditional lenders historically have more stringent decision factors and lending credit restrictions in place to minimize their risk. The best way to avoid a small business loan rejection is to understand the characteristics lenders frequently view as red flags. Here are five common reasons why small business loans get denied. And what your business can do to prevent these declines:
1. Poor Credit History
Your credit profile gives lenders insight into your payment history and how you handle your finances. If you have missed payments, defaulted on loans, or have several maxed-out credit cards, it could lower your FICO score. Which may negatively affect how lenders view you as a borrower. Reasons why small business loans get denied also include not having enough credit, or little credit history. Creditworthy borrowers are typically those who have FICO scores above 650. FICO recommends a few simple ways of improving your score:
• Paying your bills off in a timely fashion.
• Keeping your credit balances low.
• Opening only as many credit cards as you intend to use.
Also, make sure you understand how your credit score is calculated. According to a recent poll conducted by Nav, small business owners are 40 percent more likely to have their loan requests approved when they know their credit score and how the ratings work when they apply.
It’s important to know the differences between personal and business credit. Business credit is based on financial decisions you make as a business owner. And serves as a measurement of your likelihood to pay back lenders based on previous payment history. Your personal credit score links to your Social Security number. While your business credit ties to your Employer Identification Number. Keep in mind that many lenders will review your personal credit score. If your business is relatively new and does not yet have established credit, lenders will use your personal credit score to determine your creditworthiness.
It is recommended you check your credit report annually. You can obtain a free copy of your credit report from each of the three credit reporting bureaus: Experian, TransUnion, and Equifax.
2. Recent Bankruptcy
Bankruptcy is an indication of insufficient cash flow and is one of the top reasons why small business loans get denied. Individuals and business need money to pay for the costs of living and operations. And declaring bankruptcy is a formal indication that you’re unable to pay outstanding debts.
Going into bankruptcy -whether personally or professionally- is another frequent rationale for lenders denying applications. Some of the more common reasons why small business owners file for bankruptcy include:
• Unexpected costs that prove too difficult to absorb.
• Reduced customer volume and sales.
• Continued inability to make payments for key services that help keep the company operating.
The type of bankruptcy filed depends on the circumstances of the individual or business. Companies that file Chapter 7 usually fold because they’re short of the assets needed to remain solvent. Chapter 11, which is a lengthier process, may result in the reorganization of assets so debts can be repaid. The chapter chosen can influence your credit score and loan eligibility.
Lenders view having a bankruptcy on your credit profile as a red flag, but it doesn’t necessarily mean you are shut off from borrowing forever. An alternative lender that offers bad credit business loans could be a solution. If you have filed for bankruptcy, you should immediately focus on ways to improve your credit profile while you wait for the bankruptcy to be removed from your reports. Consider obtaining a secured credit card, becoming a member of a credit union, or finding a co-signer to get your credit back on track and increase your chances of being approved for a small business loan.
3. Inconsistent Cash Flow
Lenders want to ensure a business has more money coming in than going out before giving the go-ahead on an application. This principle is better known as positive cash flow. Having inconsistent cash flow is one of the reasons why small business loans get denied. This is because the lender wants to see that your business makes enough money to cover monthly loan payments.
If the financial data presented suggests a negative cash flow or one that’s in a state of flux, lenders may suspect that cash flow history could be a sign of what’s to come. While consistent business cash flow may not always be possible, it’s what lenders prefer. Make sure you demonstrate all of your company’s income streams if you offer more than one service or product. And the trend of those sales over time. Unsecured business loans can serve as an ideal loan type if you need cash quickly and are often easier to obtain from alternative lenders.
4. Short Time in Business
Lenders frequently make their decisions based on historical financial performance. Therefore, having a newly established company is one of the reasons why small business loans get denied. This reality is part of the reason why it pays to have a high credit score as an individual because it provides lenders with a quantitative accounting of borrowers’ personal financial situations. A lack of collateral can also present potential stumbling blocks to obtaining working capital.
Lenders may also try to determine how long the company will survive. The survival rate for new businesses after one year is roughly 80 percent, according to the most recent statistics available from the SBA. That’s the highest rate of success since 2005.
5. ‘Worry-Worthy’ Industry
Traditional small business lenders often have tight restrictions when it comes to approving small business loans for certain industries. Regardless of how profitable your business is, if lenders perceive your industry as risky or unpredictable, they may deny your loan request. For instance, a lender could label the construction industry as being financially unstable, due to its seasonal nature. According to Entrepreneur magazine, outside conditions can also influence a lender’s decision. A quick service restaurant business may have a harder time being approved for a loan when food prices are rising, because the higher prices may make it more difficult for you to turn-a-profit.
Getting denied for a business loan can be a setback, but it doesn’t mark the end of your success in business. Figure out what likely caused your loan to be denied and the required steps needed after your loan application is rejected. Just as lenders must make small business loan decisions, you can increase your chances of being approved by choosing the right lender. QuickBridge is proud to be part of a new generation of lenders serving small businesses left behind by the unrealistic expectations of name-brand lenders. We strive to provide the service and working capital that business owners need to succeed.
QuickBridge provides pinpoint funding for your business needs. Contact us to learn more about what fast, efficient financing can do for your company.