For business owners, it’s a terrifying situation: you were planning on getting that business loan, but the bank rejected your application.
Over the past few months, several small business CEOs have struggled to get their business loan application not approved and have asked for help.
Sharita Humphrey is an award-winning finance expert and financial mentor. She recently tackled this issue as one of SCORE’s content partners. I’m sharing this to help CEOs assess their next step after being turned down for a loan.
There are several reasons why applications for business loan financing are rejected. Here is a list of the top four reasons why your business loan could be denied. If you plan to apply for a loan in the near future (or if your application has already been rejected), you can use this list to avoid facing future application rejections.
Your credit history provides lenders with insight into your payment history and how you manage your finances in general. If you’ve ever defaulted on loans, had multiple missed payments, or maxed out your credit card, it could lower your FICO score. This, in turn, can affect how lenders view you as a potential borrower. Other reasons for business loans being rejected include not having enough credit or having little or no credit history.
Generally, creditworthy borrowers are those with FICO scores above 670. FICO recommends a few simple ways to improve your score:
- Pay your bills on time.
- Check your credit report regularly for errors and dispute them immediately.
- Pay off your debts.
2. Incomplete/invalid documents/documents
Unfortunately, one of the most common reasons business finance applications are rejected is due to incomplete or invalid paperwork and documents.
The applicant may not have completed the application correctly or provided all the necessary supporting documents.
Among the documents required by most lenders are bank statements, tax returns, proof of business registration, business licenses and permits, financial statements, employer identification number (EIN ) and your personal and professional credit reports. They may also ask you to submit other documents related to your business, such as leases, contracts, permits, licenses, and corporate documents.
To avoid any problems, make sure to put your documents in order before submitting your application. Then be sure to check everything. Also, don’t forget to go through each step of your loan application carefully to make sure you complete it correctly.
Most traditional lenders require you to provide sufficient collateral before you can obtain a business loan. If you don’t have enough collateral — or if you don’t provide the right kind of collateral — chances are you won’t be approved for your business financing. The warranty can take different forms, such as an automobile, a house, heavy equipment, etc.
You may be thinking, “But I can’t afford to buy professional gear without a loan!” Unfortunately, it’s the reality: chances are you won’t be able to get approved for a loan because you don’t have enough valuable assets. If this is your case, try looking for another source of financing, such as an unsecured loan.
4. You are a new business
If you’re just starting your business, you may not have enough credit history to qualify for business financing. Remember: Suppliers don’t always automatically report your payments to business credit reporting agencies. So, whenever you create an account with a new seller or supplier, make sure they report your payments. This will help your business build a good credit history.
Of course, it’s entirely possible for you to have strong finances and run a successful business even if you haven’t been in business for a long time. But to get the financing you need, you may need to do a little more research to find the right lender for your situation.
Dean Swanson is a SCORE Certified Volunteer Mentor and past SCORE Chapter President, District Director and Regional Vice President for the North West Region.