There are many situations that call for a business owner to look elsewhere for business funding. Financing startup costs, fueling growth, funding expansion and covering operating costs, to name a few. When a business finds itself in a tight situation, the first place the owner typically turns is their bank.
However, the task of securing a small business loan can be a very long, drawn-out process. Applying for a bank loan requires extensive documentation and long wait times for funding. To make matters worse, many of the businesses turned down for financing have no idea why their application was rejected. The following list includes 6 possible reasons why:
- Bad Credit (or No Credit)
Your credit score reveals your business and personal creditworthiness. Yes, banks typically look beyond your business’ credit score to analyze your personal credit situation. Both you and your business have multiple credit score by various credit bureaus (e.g. Equifax, Experian and TransUnion). If you have a bad credit score, the bank will assume you don’t take your financial obligations seriously enough. Thus, their reluctance to take a risk extending you a loan.
- Weak Cash-Flow
A positive cash-flow means your business has enough money to cover rent, payroll, inventory, equipment purchases and other operating costs. Even if your business is profitable, it can still struggle to maintain sufficient cash-flow. Jay DesMarteau, head of small business banking at TD Bank, suggests that “If your business has too tight of a margin, work toward lowering expenses or finding ways to grow revenue before applying for a loan.”
- Limited Collateral
Collateral is physical property that guarantees the loan if that loan is not repaid. Most banks will require collateral before they’ll agree to lend to you. This is a problem for the business startup or companies that have little to no equipment or real estate to offer as collateral. Others are unwilling to offer their personal assets (homes, cars, etc.) as collateral. All in all, the amount the bank will be willing to lend to you will be based on the value of your assets.
- Lack of Preparation
Many applications are turned down simply because the business owner was not fully informed about the application process. They walk into the bank assuming it’s as simple as filling out an application and getting approved. They fail to realize a business plan, financial statements or projections, personal and business credit reports, tax returns and bank statements are required. Other relevant documents include: articles of incorporation, contracts, leases, and licenses and permits.
- Business Loan Type
According to a 2014 Harvard Business School working paper by Karen Mills, a former SBA administrator, most small businesses seek loans of less than $100,000. Because it costs banks the same amount to process a $50,000 as it does a $1 million loan, banks obviously prefer to underwrite larger loans. This has led many business owners to turn to alternative options, such as microloans or merchant cash advances with alternative lenders like First American Merchant. These alternative business loan options often provide more flexibility and the cash your business needs when it needs it.
- No Track Record
As mentioned previously, banks require thorough financial information and a complete business plan. Extensive documentation, however, requires adequate business history. A business startup will have a limited past financial history and credentials, creating a significant hurdle in the quest for funding.