You are here because you own a business. Or maybe you wish to establish one. You believe you have the potential, and this is your golden egg for retirement. Tell you what, there is no limit to what you can do with your life. Even the sky is not the limit. You can be the next Warren Buffet, Donald Trump, Mark Cuban or Sir Richard Branson. If you believe in yourself and your product, you can change the world. Indeed.
And now we delve into the nitty-gritty matters of business. It is always a good idea to establish a business first, then borrow money to boost a growing business than a total newbie. However, again, due to many circumstances, you may need to borrow money to start a brand new business. Whatever stage of growth your business is at, you will need a business loan, eventually.
While there is no telling what the lenders can say to you when you go seeking a business loan, it is always very advisable to polish a few things so that you increase your chances of getting the loan.
What the credit officer really thinks about your business?
Lenders are big entities, you know, like banks, and credit institutions. However, behind the closed doors are people. These people have every intention of lending businesses money. But before they can lend a business money, they ask themselves a few questions, of course with instructions from above J.
- Is the business on sound financial footing?
- How is the product that the business is selling going to impact the market?
- Will the business be able to pay back the loan? With interest of course
- How has the business been operating? Has it been paying its creditors on time?
- Does the business have any credit history?
- Is its business plan feasible?
And so on ….
Credit officer also thinks about you, the business owner … not too kindly
And then they will look at the person behind the business. Really, you and your business are one entity. If you are a broke, poor-credit-history person, how then can you run a successful business? Well, maybe you have been watching Shark Tank too much …
- So the lender will want to know some answers to certain personal questions:
- What is the credit history of the business owner?
- Has there been any judgments passed against the owner, you know liens, bankruptcies and such?
- Have there been many inquiries into this person’s credit history? Why?
Frightened? No need to be, and anyway, that is the truth. If you feel too afraid, perhaps you are not ready for business.
But make no mistake about it …
There are many reasons lenders may turn you down, but the lender wants to lend your business money, by every means possible. However, he wants to make sure that he will get his money back with interest. C’mon now, wouldn’t you want the same if you were in the bank’s shoes?
Is your business a high risk or a low-risk borrower?
So the lender stares straight at the documents that you presented, you know, the tax history of the business, the employee details, the licensing and permits, the business plan and so on.
He scratches his chin, with his thumb… And he thinks … what risk does the bank stand of losing its money if they lend to you? Very high!
Ok, decision made. Takes the pen, and goes to write…DENIED!
But before pen can meet paper, he stops. And he thinks… wait, there is another way. Even if this is a high-risk borrower, it is still a business. And no matter the financial standing of the business, the owner went into business with one desire only; To Succeed.
And that is how high-risk business get business loans, albeit at higher interest rates than the low-risk borrowers.
But seriously though, here are 10 reasons lenders may turn you down for a business loan:
Reason 1: Lack of, or low personal credit
What did I tell you? Behind the façade that you could be calling a business, there is a person, a human being, the vision bearer. The lender is interested in knowing this person, just a little bit.
This person now, if he does not have a good credit history, and his FICOScore reads 355 (too darn low and bad), he cannot run a good business most probably. With a low personal credit score, you will be denied the business loan, or you could get it at unfriendly terms.
Do yourself and your business a favor, and look at your credits (the plural is intentional). Get your personal and business credit report and look at them keenly. And think… if I don’t like what I see, why should the lender like it? If I were a lender, would I lend to myself with this credit?
Now, before you trip all over, no one can have the best credit. But there is reasonably good credit, and unreasonably bad credit. Even average credit can get you a business loan, but bad credit will not. Perhaps you want to work on improving your credit before you can apply for that loan.
Reason 2: Lack of business credit
Since you went to business one year ago, you have not bothered to start establishing credit history for your business. History means your business has, or has not, been meetings its debt obligations.
If a business has no credit history, the lender will be wary about giving out that business loan. You see, they do not know that the business can pay!
Ok, so you have been paying your suppliers on time every month or week? Why then have they not been reporting that to the credit bureaus? Simple, because you choose a supplier who doesn’t care. Or you did not ask them to report those payments.
Business and personal credit must be reasonably sound, both of them when you are going to ask for a loan.
Reason 3: Lack of collateral asset – networth
Collateral is security. The lenders know that they can always liquidate the collateral if the business fails to pay.
However, not all businesses have enough collateral. Enough in this instance means one thing, which it is, or is more than, commensurate with the amount that you are borrowing.
But that is not all. The lender will also consider factors like depreciation. The collateral that you are putting up must be able to retain the value for the duration that you are borrowing the loan.
If it is a depreciable asset, well, that is that. You may not get the actual loan amount that you wanted.
Reason 4: Lack of time in business – new, young or startup
Damn statistics! Why are they always so right? They say that many businesses will fail within three years of their establishment. However, you must not let that put you down. You must be determined that yours will make it beyond those “doomed” three years, and that you will pass it to generations after you.
Newbie businesses and recent startups are sometimes denied loans on account that they have not weathered any storms. Yet.
As very new in the business, you have not established any credit history. So the lender does not know that you can pay. Thus, as soon as you go into business, tell your suppliers to report any payment you make to them, to the credit bureaus.
Reason 5: Lack the capacity to cover debt load
Lenders are businesses, and they know the signs that the loan burden will be too much for your business. Thus, either they would deny you the loan or have you reevaluate the amount that you are borrowing.
Of course, your financial statements are going to show other debt obligations that you are meeting. What the banks want to see is a healthy cash flow, where you get enough to pay your mortgage, stock your stores and meet employees wages. If they see any signs that your business is struggling to meet its needs, they cannot be sure that you will be able to pay them back.
Narrow margins, small amounts or no money in the bank means that you are not financially sound. If you want that loan, maintain money in your business bank account.
Reason 6: Poor plan for investing the loan
Lenders can be nasty, well, in a tongue in cheek way. You see, they want to see your business plan. And then they want to see the plan for investing the loan you have applied for.
Among the things, they will be looking for include making sure that the loan is going to be used for the business and not for other things. They also want to see your projection of figures. You had better have numbers, estimates and all.
Going by the performance of your business for the past one year, can you demonstrate that getting $150,000 loan will get back the same amount in a year? This is just an example. If you have numbers to support your request, the lender is assured that you can be able to pay back the agreed amounts every month.
If your loan investment plan is more utopian than practical, well, you will not get it.
Reason 7: Lack of revenue or low-income potential
What is the return on investment of your business? If it is high, the lender will be looking for evidence. The reasoning of the lender is that the business has to be making money for it to be able to spend money on loan repayments.
If a business has cash-flow troubles, then there is no guarantee that the debt will be paid. Out of the money that you are borrowing, how much of it will you spend on your business immediately and how much will you hold.
If the lender sees that you have spent all of your line of credit, then you will be considered a risky business and you may be denied a loan.
When applying, go with the records of the past sales. Have the sales been increasing over time? More sales mean more revenue. Actually, the best time to borrow a business loan is when your business is at its healthiest.
You must show the lender that even without touching the amount that you are borrowing, the business can still meet its debt obligations every month.
Reason 8: Too much credit inquiries
Whether for your personal or business credit, too many inquiries into your credit mean that you are asking for more credit and therefore, creditors are looking into your capability to repay. However, not all credit inquiries are bad.
When mortgage companies, banks and insurance companies check your credit report that will not affect your FICO Score. The problem is when there are small lenders, suppliers and credit card companies doing credit inquiries. Every such inquiry can cost you a few FICO scores.
But these credit inquiries only happen when you are requesting for new credit line, credit card or loan. So be careful about them. They may determine whether you get the loan, or not.
Reason 9: Recent Open Liens, BK, Judgments and Repossession on the credit
Car repossession, bankruptcy, home repossession, liens and so on will appear on your credit report. To a future lender, they only mean one thing, that the person for whom they appear is not able to pay back what he/she owes.
Bankruptcy comes under chapter 13 and chapter 7. In chapter 13, it means you paid part of your debts while chapter 7 means you did not pay any of your debts. These bankruptcies will stay on your record for 7 and 10 years respectively.
A tax lien means you have been a bad boy, been denying Uncle Sam his dues and such will stay on your personal record for seven years. At the same time, remember to compile your business tax records. No bank will lend you money when you do not fulfill your tax duty.
Reason 10: Future of your industry
Let us assume that you are in an industry that is soon going to be phased out. For example, if gasoline powered cars are being phased out by the hybrid and electric cars, then lenders may refuse to give you money if you are a dealer intending to import cars from Europe.
If the real estate bubble is about to burst and you are borrowing money to build homes for sale, well, the banks will deny you the loan.
All that the lenders want to know is that you will be in a position to repay their money, so they also consider how risky the industry may be.
These are just 10 reasons lenders may turn you down. As we said at the beginning of this article, there are many more reasons lenders may turn you down. For example, a lender could deny you a business loan just because they think small businesses are riskier to fund than big businesses. Before you apply for that loan, find information, and due preparation is also advised.