You’ve come to the point in your business where you’ve decided to take out a loan…only you’re getting denied by banks. What gives?
Every bank is different, so you might consider applying for a loan or line of credit at a different bank, but before you do, learn some of the common reasons a bank will deny a small business for a loan.
You Haven’t Been Open Long Enough
While you need money when you first launch your business, that may not be the best time to take out a loan unless you have a business credit history from a previous company you ran. Banks like to see you in operations at least two years so that they get a sense of how stable your company is, and how likely you will be to pay back the loan.
The Small Business Administration, however, may be willing to lend to a new business, so look into SBA-backed loans. Other banks may be willing to lend to your new business…at a higher interest rate.
You Have a Low Business Credit Rating
Just like you have a personal credit score, you also have a business credit score, and that number indicates your risk level to banks. Similar factors go into your business score as your personal one: how many credit cards and lines of credit you have open, how much credit you’re using measured against your overall credit availability, whether you’ve paid your installments on time, how old your credit lines are…
Before you apply for a business loan, find out what your business credit score is so you know whether you’ll even qualify. If your score isn’t where you want it, work to first pay off some of your debt, always pay your bills on time, and open credit lines with your vendors to establish a credit history.
Your Cash Isn’t Flowing
You need a loan because you need cash, so why do banks want to see your cash flow? The thing that most entrepreneurs don’t understand is that you shouldn’t take out a loan when you’re strapped for cash. Banks want to see that you have enough revenue coming in to pay your overhead, payroll, office expenses, and the business loan installment.
Sure, maybe the current cash crunch is temporary, and you may still be able to qualify for a loan if you can provide several months’ worth of invoices to show that this is an anomaly. But in general, you’re more likely to be approved for a loan when your business is steadily bringing in money.
You Don’t Have Collateral
Just like a bank would take your house if you’re foreclosed on your home mortgage, the bank also wants some sort of collateral against a business loan should you default on payments. This could be your office real estate if you own it, equipment, or even personal assets.
If you work from home and have no equipment to speak of, the bank may not feel confident in loaning you money.
You Have No Plan For What You’ll Do With the Money
Many banks want to see your business plan, as well as what you intend to do with the loan you get. If you simply like the idea of having cash on hand, a bank may not approve your loan application.
Banks like to see that you want to:
- Expand operations
- Open a new location
- Invest in research and development
- Hire new staff
- Buy new products to sell
Essentially, you just need to know what that money is going to be used for, and that the investment will help you make more money.
You Want Too Little Money
You might think the smaller the loan, the easier it will be to qualify, but some banks have minimum amounts they’ll loan. If you’re not ready for $50,000 or more in financial responsibility, you may need to look for a private lender (who likely will charge a higher fee).
If you’re looking to take out a business loan, consider the bigger picture: what could you do with more money?
Your Customer Base is Shaky
Banks are all about risk assessment. If you seem like your business isn’t on solid ground, the likelihood that you will be able to repay a loan is low, as the bank sees it.
If you haven’t yet established a steady cadence of customers buying from you, you may find it challenging to qualify for a loan. Wait until you have a solid six months of steadily increasing revenue before applying for a loan.
Know that you have many options when it comes to business finance. Some, of course, will charge a premium, but if you really need capital and a traditional bank isn’t panning out, find the lender that fits your needs. And do what you can before applying for a loan to ensure your business looks like a great investment.
Susan Guillory is the President of Egg Marketing, a content marketing firm based in San Diego. She’s written several business books, and frequently blogs about small business and marketing on sites including Forbes, AllBusiness, and Cision. Follow her on Twitter @eggmarketing.