You have this brilliant business idea, and you have the plan laid out but one thing is stopping you from achieving greatness: Money to expand. However, you have your eyes set on a small business loan, but after applying, the bank turns you down.
What next? The right question, however, should be, why did the banks say no?
First off, you’re among the many small business owners suffering from lack of funds to grow their startups. Second, the contributing factors leading to your loan application denial may be out of your control. Some of them include tightened lending requirements, reduced loan demand, and high costs that have slowed down small business borrowing, especially after the 2008 financial crisis. While these factors may be out of your control, getting turned down for a loan is heartbreaking.
This is why you should strive to find out the exact reason of your denial. That way, you’ll be able to correct the mistake for another round of application. If the bank agent isn’t kind enough to share the reasons behind your denial, the following could be your answer.
Poor Cash Flow
Cash flow is all about the amount of money coming in and going out of the businesses. This is what banks will look at when considering startup loans. Did it show any signs of stability in the past few months or years? Will cash flow increase in the future?
Sufficient cash flow allows businesses to meet their financial obligations including acquiring inventory, payroll, rent, etc. However, few startups meet this requirement when applying for business loans.
On the other hand, even profitable businesses find it difficult to bank their money. Most of the time, they need to clear with suppliers before they can receive payment for their services or products.
Small businesses owners, however, can improve their cash flow by creating and sticking to a budget. This will give the owners a better understanding of how much money goes in and out of the business. If you notice a decline in the cash flow, then it’s time to start looking for ways to cut down on expenses or better yet, find ways to earn more money to avoid rejection by banks.
Business Experience and Collateral
It’s no lie that startups face an uphill task when seeking funding to take their businesses to the next level. However, banks aren’t the most suitable places to start your search for a startup loan. In fact, if you intend on going down this route, make sure you’ve been in business for at least two years.
Depending on the bank you choose to explore, you might have to have been in business for at least three years to qualify for a business loan. Why such a long time? To prove consistency in both gross and net profits, traditional loans need at least two years’ tax returns, maybe more.
Also, startups rarely have any collateral such as real estate or equipment that’s often needed in case you default on the loan. With such obstacles, the only option is to find alternative funding sources such as online merchants, crowdfunding, or peer-to-peer lenders. If you’re asked for collateral, consider using your car or home.
Poor or Bad Credit
Your credit will be the first item on the lender’s checklist when you apply for a $10 000 loan with bad credit for business. This will enable them to evaluate your trustworthiness, whether or not you’re good at managing both your business and personal finances, etc. Good credit means you’re good at both and that you’ve stayed away from bankruptcy and made on-time payments.
On the other hand, a poor score proves you’re poor at money management, and this will deter lenders. According to lenders, if you can’t manage your own finances, it means you’ll be unable to meet the obligation agreed on the terms of the loan.
Not all hope is lost though. You can repair your credit by implementing several tips. For example, pay your bills on time, maintain a low credit utilization ratio (under 30%), and also ensure that you don’t have any negative entries on your credit report.
Remember, bad credit on the owner’s side or the business itself will dramatically reduce the chances of qualifying for a loan.
Lack of knowledge about the entire process is one of the reasons why many businesses fail the application process in the first place. The business owns believe the process is as simple as, “I walk through the bank doors, pen down a few details and walk out with the money.”
Well, sorry for being the bearer of bad news, but the process is lengthier than and more in-depth than that. According to the Small Business Administration, it’s important to have a solid business plan, banks statements, tax returns, business and personal credit reports, and financial statements before applying for a loan.
Also, don’t forget to include applicable permits and licenses, leases, contracts, article of incorporation, and any other legal documents required for business operation.
You have a great credit score, all the necessary documents, collateral, and strong cash flow, but the bank still turns down your application. What could be the problem? Well, it could be nothing on your part. Instead, it could be external factors purely out of your control.
Banks will always consider these external factors before approving or declining a loan application. It may be regional or local economic trends, the business location, competitors, or industry experience.
Other conditions may include federal, state, and local ordinances or even climatic conditions that could affect the business that may result in a loan denial or approval.
Alternatives to Small Business Financing
- Family and friends: Close friends and relatives are always the first people you’ll run to when you need some help. In this case, you can consider one of two options: an equity interest where you can cede some ownership of the business. In return, you can get the much-needed funding. The other option is getting a direct loan or asking the person to become your co-signer.
- Vendor/Trade credit financing: This is a great move for the business when it comes to improving the overall credit rating. This type of financing works by asking vendors to extend the terms or even setting up credit accounts.This will reduce the dependence on traditional loans. However, you must keep in mind this method will only work if you’ve been in business with the lender for a while. Others will want to know your business experience to determine how much you know about the business before agreeing to the deal.
- SBA loan guarantees: Note that the Small Business Administration only guarantees the loan and doesn’t issue loans directly. Look at the agency as a co-signer. While this route involves a lot of paperwork, it’s worth the wait.
- Credit card financing: This will be your last resort because the interest rates associated with credit cards are high. Therefore, if your business doesn’t take off fast, you may end up in deep financial problems.
Starting a business is difficult but maintaining one until it reaches profitable levels is even harder. Business funding presents the main problem for business owners but even so, getting one is difficult for the reasons as discussed in this article.
If you can plug the holes that deny you the necessary funding, there shouldn’t be any problem going forward. However, if everything else fails, it’s better to take baby steps and exercise frugality. Eventually, with hard and smart work, persistence, and discipline, you should reach your desired goals.