Starting a business is one of the most difficult and rewarding endeavors to undertake.
While the road to profit is a difficult uphill climb for most, many never get the chance to even set out on the path to building up a business.
Businesses can take a great deal of money to launch, and with commercial lending on the rise, there’s never been a better time to try to obtain business loan financing.
However, all too often, applicants are rejected by lenders and denied business loans. While certainly, bad business ideas shouldn’t be given business loans, many a times it is not the idea of the business that is rejected, but rather a mistake on the part of the applicant.
Here is a list of top five reasons a business loan can be denied. Future business loan borrowers can use this list to avoid facing rejection and denial themselves.
1. Bad Credit
Even though not everyone has the best credit, as far as lenders are concerned, this just isn’t an excuse. Poor credit is simply a sign that a borrower, or their business, does not prioritize repaying their debts.
Diane Roehrig, President of Alacom Finance, told loans.org that even if business loan applicants unintentionally miss a payment on a credit card, house, or car payment, such a mistake speaks volumes to lenders.
Even more important is the credit score of individual borrowers as well as their businesses.
“It’s important to have a firm grasp of both your personal and business credit before finding yourself in need of a loan,” said Andrea Gellert, Senior Vice President of Marketing for On Deck Capital. “Most banks typically won’t loan to a business owner whose personal credit score isn’t above a certain threshold (typically about 680).”
2. Not Enough Collateral
All business loans require collateral. Unfortunately not all businesses, cash flow and profits aside, have sufficient collateral to support the size of the business loan they wish to borrow.
Another obstacle is the price depreciation of certain collateral.
“You paid $300,000 for a mounted bridge crane, but it has loss it value over time and is now worth less than you wish borrow against it,” said Roehrig. “In short, you may not have sufficient cash value in your business holdings for a loan approval. Know the value of your collateral before you ask the bank for the loan.”
Borrowers often make the mistake of under-capitalizing their business loan application. This means that they offered up the wrong collateral, or simply lacked the time to see a business loan application through to completion. Fortunately, there is a wide range of capital and collateral for borrowers to draw upon, even if at first they aren’t immediately obvious.
“Your personal and professional resources including fixed assets, retained earnings, and the even an owner’s equity, can be attached if required to secure repayment of the debt,” said Roehrig. “Again, do your homework, know what capital you have on hand. Know what you can pledge and use to grow your business and repay the bank’s loan.”
4. Cash Flow Problems
If there is one thing all businesses have in common, it is that they exist to make money. There is no other foundational point to any business aside from making a profit. As a result, lenders see no reason to offer money to a business that has serious cash flow problems. After all, if a business isn’t even making money to begin with, then there is no need to hand it a business loan in the hope that is generates growth.
“Whether your capital needs are for an established business, aka an expansion, or a new startup company, adequate cash flow needs to be available to repay a loan,” said Roehrig. “You must be able to re-pay all other business expenses as well as their personal needs outside of the capital you wish to borrow.”
Assuming a business does have excellent cash flow, that doesn’t mean that it is going to automatically qualify for a business loan. Unfortunately, the amount of time a business has been in operation can affect whether it will be approved for financing.
“Most bank term loans are not ideal for startups or very young businesses, and typically look for a few years of revenue generation,” said Gellert. “However, starts ups can apply for SBA loans (which are loans made by a bank with a portion guaranteed by the US government). Most large banks have SBA loan departments, so be sure to check with your local branch.”
5. Difficult Conditions
Even if a business has excellent collateral, credit, and is well run, there is still the possibility that it will soon face industry-specific difficulties. For example, a lender may be hesitant to lend a business loan to a transportation company in the wake of rising fuel costs. The lender may expect that the soaring costs of fuel are just going to overtax the transportation company and make it difficult to grow or generate a profit.
“Outside influences are always considered prior to a loan approval or decline,” said Roehrig. “They can include industry experience (do you have the work background to manage your own business), a business’s location, local or regional economic trends, competitors.”
Roehrig said that local, state, and federal ordinances, in addition to seemingly unrelated factors, such as local climate conditions, may also influence an applicant’s approval or denial.
While every industry faces obstacles time and again, some lenders outright refuse to lend to businesses in certain industries.
“Historically, working with the banks has been hit or miss for specific industries, including restaurants and construction-related businesses,” said Gellert. “Be sure to ask your account representative about your specific industry before you start the application process.”
These five reasons are warning signs to look out for on the road to getting a business loan. Even if borrowers achieve success and borrow business loans, they still have to successfully run their business and payback their lender. While not all ideas need financing to get started, getting a business loan is a great aid to launching a new company.
By Isaac Juarez – May 17, 2013