Business Loan: Why you were rejected
Finding a lender for a small business can be tough. Rejections often happen because of a few different reasons. Some of the more common reasons for business loan rejection are poor collateral, bad credit, and underperformance of the business. Concentrating on strengthening these aspects of a business and its owners are the first steps to turning a loan rejection into an approval.
Often lenders offer secured loans as a way for them to recoup some of their investment in the event of default by the burrower. These types of loans are secured by collateral from the burrower that can help offset shortcomings in other areas of the business’ application. Collateral can be anything from heavy equipment for a construction company to fleet vehicles for a courier company or kitchen equipment for a restaurant. These items will be relinquished by the burrower to the lender in the event of default on the loan, and they can then be liquidated by the lender to recoup some of the capital lost on the loan.
Poor credit of the business or the owners is another red flag to lenders. Credit history is a method with which lenders evaluate the financial acumen of a potential burrower. If the burrower’s history is plagued with late payments, defaulted loans, or a bankruptcy their credit score will be lower and can indicate to a lender that this person or company is not capable of managing debt. Working to increase one’s credit score can be done by incurring debt through a credit card or small loan and successfully paying it of in a timely and regular manner. The more successful debt repayments that occur over the history of the entity, the better its credit will be.
When it comes to business, first and foremost, it is important that it makes money. This means that the cash flow of the business needs to be positive. Expenses need to be lower than revenue and a consistent profit needs to be documented and shown to the lender. Failure to do this can result in business loan rejection and is a perfectly warranted reason for not lending money to a business. Just as a person wouldn’t bet on a horse with a broken leg in a horse race, a lender will not put money into a business that is destined to fail.
Aspects that affect the rejection or approval of a loan for a business by the lender are many, but focusing on a few major aspects of the decision can increase one’s chances of being approved. Good credit, good cash flow, and significant collateral can make a lenders decision to give a business money an easy one, profitable for both business and bank alike.