Are you thinking of taking out a loan for your small business but are concerned about getting rejected? While it’s true that only one in four small business owners will qualify for a bank loan, alternative lenders have been approving roughly 60 percent of small business applicants according to a 2016 study. And no matter what type of lender you want to borrow from, your business’s eligibility is under your control—to a degree.
By understanding these six common reasons why entrepreneurs get turned down for small business financing, you can work to improve your odds the next time around.
1. Credit Score
Your personal credit score is a major factor of your business loan application. As a small business owner, your personal financial habits will likely determine your business’s—or at least, that’s what lenders think.
The higher your credit score, the more reliable you’ve been as a borrower in the past. Making late loan payments, carrying too much debt, and applying for multiple kinds of credit at once can all hurt your score and your chances of getting the business financing you want. Higher credit scores are correlated with qualifying for lower-cost loans, like SBA loans, while a lower score could get you rejected.
2. Cash Flow
While your credit score shows your good financial habits, your business’s cash flow will reveal whether you can actually sustain a loan or not.
If you regularly deal with late paying customers, long-term invoices, large purchases that took a long time to get recouped, and so on—in other words, if your cash flow is slow and wouldn’t manage well with a surprise expense—then a lender might question whether you can really afford regular loan payments on top of everything else.
3. Age of Business
The longer you’ve been in business, the more challenges you’ve overcome. That’s why some lenders prefer to work with entrepreneurs who have managed their businesses for two years or more, for instance, and why many give more favorable terms to even more established veterans.
On the flip side, this is why some new business owners have a harder time qualifying for financing. Startups have no financial history, so lenders can’t use data to determine whether you’ll be able to repay your loan.
If you’re in serious need of business funding, then you may want to search for shorter-term, higher-cost loans that get offered more readily to newer businesses.
4. Tax Liens
If you haven’t paid your taxes on time and have a tax lien on your business, some lenders might not be able to approve your application. Lenders don’t like to see when you don’t pay what you owe, but it would also mean they’d have to take second position. It’s still possible to get a business loan with a tax lien, but you’re probably better off paying your taxes to remove the lien from your business.
5. Unfiled Tax Returns
One way lenders analyze your finances is through your business’s tax returns, which they use to verify a lot of information you self-report, such as your profitability. If you’ve yet to file your tax returns and don’t have that information to show lenders, you might not be able to find funding with certain lenders.
6. Too Much Debt
While taking out a small business loan can be a great way to speed up the growth of your business, you do want to be careful about accepting too much debt. The more you owe, the more restricted your cash will be—and the less convinced a lender might feel about you having the ability to pay them back.
Final Advice
While these are six relatively common rejections, this is not a comprehensive list of why your loan application might fall short.
It’s important to give a lot of time and attention to your application and to make sure your business is in the best standing possible—given your circumstances—before asking a lender to borrow their money.
The post The Most Common Reasons Business Owners Are Turned Down for Funding appeared first on AllBusiness.com
The post The Most Common Reasons Business Owners Are Turned Down for Funding appeared first on AllBusiness.com. Click for more information about Meredith Wood.
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