A business loan can be a very important resource for business owners. These types of loans are often used to obtain necessary funds to open or expand a business. But while business loans are typically easy to find, they are not always easy to qualify for. Unfortunately, many business owners lack proper understanding of the loan process. Therefore, they are often not properly prepared when they submit their application. Here are some common reasons for getting denied for a business loan, along with ways to overcome these challenges.
Poor credit history
One of the most important qualifiers a bank uses when evaluating a business loan application is the borrower’s credit history. They look at a number of factors, often paying particular attention to the overall credit score and payment history on both open and past accounts. Additionally, they can look at how long accounts have been established, current balances, collection accounts and more.
It is important to note that banks can deny a business loan application based on the credit history of the business as well as the borrower’s personal credit history. Therefore, it is important to check your own credit before applying. This way, you can clear up any collections and get any inaccuracies corrected before a bank pulls your credit report.
Securing a business loan approval takes a lot of organization. Lenders will require a lot of details and documents regarding your business. They need this information in order to assess your level of risk and determine if a loan is a reasonable investment. Therefore, it is very important to spend the time gathering what is required, no matter how much effort it takes.
Before submitting the loan application, make sure to track down each and every bank statement, tax document, business license and any other document the bank asks to see. Additionally, prepare a thorough business plan which details exactly what you want the money for. Getting yourself organized and preparing a complete application package could mean the difference between an approval and a denial.
Limited cash flow
Cash flow is the measure of how much cash you have on hand to pay back a loan. In simple terms, it is what is left after you pay all of your normal daily business expenses. Sufficient cash flow shows that your business brings in enough money to cover the costs of any current debt your business has in addition to the cost of a new loan. For this reason, cash flow is usually one of the first things a lender looks at when determining a business’ eligibility for a loan.
There are a few ways to improve your cash flow picture, and therefore increase your chances of getting a business loan approval. First, you can increase your net income. Second, you can try to decrease your business expenses. The third, and most common, solution is a combination of these two. New businesses, and businesses looking for funds to expand their operations, will need to rely on estimated cash flow projections. Without a financial history, these projections need to be as reasonable and accurate as possible.
Not understanding the complex small business loan process
The process of applying for a business loan can be quite confusing and overwhelming to small business owners. To this end, many loans get denied simply because the applicant did not follow the correct procedures. The solution to this common challenge is to work with an experienced attorney who understands the business loan application and approval processes. For example, our attorneys have assisted business clients of all sizes obtain the financing they need through our decades of experience navigating the complicated procedures. We can help you analyze the many available programs to determine the best possible options. And we can provide valuable guidance for proper preparation before applying. Additionally, we can assist with thoroughly reviewing the application before submission. In the event of a denial, we can suggest possible alternative funding options.
Contact Churchill, Quinn, Hamilton & Van Donselaar, Ltd at 847-223-1500 to learn more about our comprehensive legal services for businesses or to schedule an initial consultation.