If you ever went to a dance in high school, you’re probably already familiar with rejection. Unfortunately, the pain doesn’t stay in your streamer-clad cafeteria, especially if you own a business. Running a business takes money, and it’s not uncommon for business owners to borrow to fund their ventures. In 2011, 57% of small business owners sought financing, and trends insist that more and more business owners are seeking financing.
In 2014, more than half of small business owners who applied for credit received nothing at all, according to a survey by Forbes. In this particular case, it was due to their business credit score, but there are a variety of reasons small business owners are rejected for business loans. Here are six reasons that could explain why you were denied.
1. Time in Business
From the lender’s side, the underwriting and loan application process is all about assessing risk. There are a variety of perhaps better-known factors that go into it, but one that is perhaps unique to business credit is time in business. While there are a number of business loans and business credit cards designed specifically for startups and young business owners, most options are for established businesses.
In general, a business will require your entity have at least two years in business to be potentially approved for a loan. Not only does this give your business some longevity and proof that you can keep the business up and running, but you’ll be able to provide the proper tax documents and financials to put the underwriter’s mind and calculator at ease.
2. Business Credit Score
Hey business owner, guess what? You have a business credit score. According to a joint survey conducted by Nav and Manta, 72% of business owners didn’t know what their business credit score was, and a slightly lower percentage reported they didn’t know what a business credit score was. It’s relatively simple; just like you have a personal credit score that serves as an assessment of your ability to pay back and deal with debt, your business credit score does essentially the same thing for your business.
There are a number of differences between personal and business credit scores, including the range of the scores themselves; while a personal credit score of, say, 70 would be off-the-charts (literally) atrocious, it’s a great Dun & Bradstreet Paydex score, which goes on a range of 0 to 100. If you’re not sure what your score is, check it for free with Nav.
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3. Insufficient Cash Flow
For all points on this list, except maybe time in business, there is a simple parallel in personal credit. For cash flow or revenue, the comparison would be your gross income. Now, just having a multi-million dollar cash flow, as awesome as it sounds on its own, may not be enough.
Where a personal lender measures your DTI (Debt-to-Income Ratio), a business lender will typically measure your DSCR (Debt-Service Coverage Ratio). While a DTI may measure how much of your gross income is tied up in your monthly debt payments, DSCR measures how much money you make for every dollar you borrow. Ensuring you have sufficient cash flow to cover your expenses and show that your borrowing is being put to good use is a stellar point to have on your credit applications.
4. Your Business Plan Isn’t Good Enough
Don’t underestimate the power of a well-written business plan. In order to convince the lender to give you the funding you need, they need to know your reason behind needing it, and what you hope to accomplish. Remember, these guys LOVE numbers and risk, and if your reasons are too risky, to vague, or simply not thought through or articulated well enough, you might be out of look.
If you’ve been in business a while and haven’t revised your business plan, it’s always a good idea to go back and revise, especially if you’re seeking crucial funding here soon.
5. You Have Too Much Debt Already
Treat your lender like a potential significant other. What I mean, is if the prospective match sees that you already have too many other friends in the pool, they might worry about your ability to pay them the sufficient attention to make the relationship work.
It’s simple sense, if your money is too locked up with other obligations, the lender will have justified doubts about the likelihood that their money (and interest) will be paid back in a timely and complete manner.
6. Derogatory Information on Your Credit Report
Sticking with the relationship analogy, remember that you’re trying to impress the lender. Just like a possible suitor will likely look up your social media accounts pretty early into their association with you, your lender will absolutely be looking at your credit report. Make sure your credit report is spick and span before you go to apply for credit, you won’t regret time spent on it.
At times, unfortunately, there can be false information or errors on your credit report. Checking it regularly can help you stay on top of possible mistakes, and give you the power to dispute such claims in a timely manner and save time lost.
Whatever the reasons for your denial were, they likely aren’t permanent. Taking the time to review and prepare ahead of time will certainly be worth your while in the long run.
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