If you’ve ever had a business loan application denied and couldn’t get a straight answer from your lender as to why, we’re going to share 11 of the common small business loan deal killers, what they mean, and why they tend to make your application DOA.
Deal Killer #1: Unknown Recent Advances
A recent cash advance or business loan discovered that wasn’t disclosed in the month-to-date bank activity is a red flag to any lender.
What Does This Mean?
When you apply for a business loan the lender is going to underwrite your loan based upon all the available and verifiable data about your business—your financial situation, your business’ credit profile, and often your personal credit history. A lender will look at your bank statements, including several months of your daily banking activity to confirm that your business will be able to service debt by making periodic payments. Unknown recent advances or loan payments that appear in your month-to-date bank activity, but were not disclosed by you, are problematic for a potential lender.
Why Is This A Deal Killer?
In addition to trying to determine what you will do in the future based upon what you’ve done in the past (your business and personal credit history) they need to see accurate and up-to-date financial records. If you aren’t forthcoming with your current debt obligations, and they learn of them through your bank transaction records, they will likely pass on your questionable loan application in favor of another borrower.
Deal Killer #2: Excessive Negative Days in the MTD Banking Report
It’s not uncommon for a small business owner to be overdrawn once in a while, but excessive days in the red doesn’t bode well for a successful small business loan application.
What Does This Mean?
Because your month-to-date bank activity report includes a day-to-day accounting of all the transactions taking place in your business bank account (deposits, withdrawals, fees, overdrafts, etc.), lenders use it to confirm that you have sufficient and regular cash flow to make periodic payments.
Why Is This A Deal Killer?
Because lenders are trying to answer the question, “Can you repay a loan?”, they want to confirm that you have the financial ability to make each and every periodic payment. Excessive negative days in your account not only indicate that you are likely paying a lot of overdraft fees, it could also indicate that you simply don’t have the cash flow to make regular periodic payments.
Deal Killer #3: A Criminal Background History
When a bank offers your business a loan, the owner’s personal history is part of the equation.
What Does This Mean?
Most lenders, including the SBA, tend to shy away from borrowers with a recent criminal history.
Why Is This A Deal Killer?
As you might expect, a recent criminal history indicates that neither you nor your business (by association with you) are a good credit risk. The SBA requires that at least five years have passed since a conviction before they will consider a loan application. You should consider that to be a good indicator for other lenders too.
Deal Killer #4: Tax Liens
Tax Liens alone aren’t necessarily a deal killer, but tax liens you don’t disclose or liens that are not in some kind of a payment plan likely will be.
What Does This Mean?
Remember, data drives loan decisions and undisclosed advances, or a tax lien, are problematic for a lender.
Why Is This A Deal Killer?
This also speaks to a business’ ability to service debt. If you have a tax lien, are in a payment plan (and current with that obligation), and you disclose this to your lender upfront, it will improve the odds of your loan application being approved if there aren’t any other red flags.
Deal Killer #5: Recent Bankruptcies
The key words here are “recent”, “discharged”, and “disclosed”.
What Does This Mean?
In terms of a loan application, consider any bankruptcy discharged within the last six months or any open bankruptcy to be a deal killer.
Why Is This A Deal Killer?
Although it is possible to fund a prior bankruptcy that was discharged at least six months ago, there are many lenders who will not even consider a loan application for at least two years. As a general rule, the older the discharged bankruptcy the better.
Deal Killer #6: Unsatisfied Excessive Or Large Judgements
Have you ever had creditors seek legal judgement to collect a debt? It could be a problem.
What Does This Mean?
Because lenders are trying to determine what you will do, and the only information they have is what you have done, a former creditor who needed to seek a judgement to collect from you doesn’t instill confidence in a lender that you will make timely periodic payments now.
Why Is This A Deal Killer?
If the lender isn’t confident that you can, and you will, make each and every periodic payment on time, they will not approve your loan application.
Deal Killer #7: Less Than 50% Ownership Of The Business
Depending on the lender the percentage can vary, but it is unlikely a minority owner will be approved for a small business loan.
What Does This Mean?
If you have partners, lenders will want to determine if you can legally obligate the business with a small business loan. In most cases, this means you have 50% ownership (some lenders will require more and other less depending on your business). In some cases, a managing partner with a smaller ownership percentage can apply for a business loan provided there are approval documents from the other owners indicating he or she is authorized to do so,
Why Is This A Deal Killer?
Lenders are justifiably cautious about approving a loan to an unauthorized owner in case of default. If the owner isn’t authorized to borrow, the company may not be liable should a judgement be required to collect the debt.
Deal Killer #8: Major Drop In Revenue
Most lenders look at your bank statements to determine the financial health of your business. A major drop in revenue could indicate that your business is in financial trouble.
What Does This Mean?
Lenders are looking for consistent (if not growing) revenue when they evaluate your business loan application. A major drop in revenue doesn’t confirm that you have the financial ability to make periodic payments.
Why Is This A Deal Killer?
Unlike a venture capitalist that is willing to forego periodic payments to earn profits on his or her investment in your business at some future date, a lender earns profits by accepting periodic payments on your loan. If you don’t have sufficient revenue to make that payments, they don’t make profits.
Deal Killer #9: Negative Landlord Reference
In addition to your loan payment history, your business’ history of paying rent on time—as well as your utility bills—are considered when you make a loan application.
What Does This Mean?
You should expect your lender will look at your business credit report to verify that you pay your rent on time and may even contact your landlord to enquire about your history with them.
Why Is This A Deal Killer?
A negative landlord recommendation that indicates you are months behind on your business rent, or in the middle of an eviction, does not paint the picture of someone who will make all their periodic payments to a lender.
Deal Killer #10: Financial Skeletons
Any undisclosed history of defaulted or restructured cash advance or loan is a problem.
What Does This Mean?
Any thorough underwriting process will discover any previous challenges your business may have had with a previous loan or cash advance. It’s important to make sure you disclose any problems you may have had in the past so you can explain what happened then and what’s different now.
Why Is This A Deal Killer?
The fact that you may have experienced difficulty before is not the deal killer, it’s that your failure to disclose the difficulty does not instill confidence in your potential lender.
Deal Killer #11: Forgetting That Loan Officers Are Listening to Everything You Say
Consider any face-to-face or phone call with a loan officer as an opportunity to put your best foot forward and make sure you don’t say anything (even anything innocent) that could casy you and your business in a bad light.
What Does This Mean?
If you say something to your loan officer like, “I am selling my business,” or “I’m trying to sell my business,” or “I just lost my biggest client and am not sure I’ll be able to handle these payments,” it will hurt your chances of a successful loan application.
Why Is This A Deal Killer?
Although there are lenders who are looking for reasons to say “Yes” to your small business loan application, a loan underwriter’s job is to evaluate risk and determine whether or not every payment will be made on time and as agreed throughout the term of the loan. If you say anything that might cause the lender to doubt that, your loan application will likely be rejected, no matter how innocent the comment.
What Are Lenders Really Looking For?
Lenders really want to know the answers to three questions (even if they don’t ask them this way):
- Can you repay a loan? Do you have the financial ability to service debt?
- Will you repay a loan? Do you have a history of successfully making loan payments?
- What will you do if something unexpected happens? Will you continue to make your loan payments or will it put you in a financial bind that will prohibit you from doing so?
If you can answer those three questions to the satisfaction of your lender, it will improve the odds of a successful loan application. All of the deal killers listed above are clues that you might not be able to service debt, that you have a history of not making timely payments, and that you might be in financial trouble should something unexpected happen.
This article was originally written on October 21, 2020 and updated on October 5, 2021.
All the information you have outlined I know to be a true factor. The problem I have is when asking for help to advance your credit it is a cost. If a company is asking for loans it may be difficult to be able to pay for credit assistance.
I’m trying to get a loan to start up a new business that works within my professional career of 17years. However I seem to have had many issues because I have used only my income for my business assets. I’m just now 1yr in, trying to build a credit history and keep running into issues of the timeline I’ve been in business without needing a credit line.
Only so so as as an informational piece regarding the subject.
Credit criteria would be/is more helpful.
This website has a bunch of articles regarding credit and small business financing. So, try looking under the Business Credit tag for more on ‘credit criteria’.
Credit is important, but it’s not the only factor that determines if a business qualifies for a loan. So, the subject of this post is about the other factors that could also disqualify a business…