When your small business is struggling, there are different avenues you can take to turn things around, including applying for a small business loan. However, these things are not necessarily going to work out, and you may be denied one for various reasons. But what do you do if that happens?
Reasons why people are denied a small business loan
Bad credit score
There are a multitude of reasons why you would have a bad credit score. Bankruptcy filing, late payments on debts, defaulting on loans, and more. However, having no credit score at all, while not as bad as having a bad one, is not going to help you be approved for small business loans. It paints a very limited picture for the would-be lender to judge you by.
However, while a poor credit score may not be the best way to get a small business loan, that doesn’t make it an automatic rejection. Many lenders have options for businesses with a poor credit score, though it may ask more of you to mitigate potential risks. For example, they may require more collateral or a higher interest rate for you to pay it back in the end.
Credit utilization is too extreme
While using too much of your credit is potentially problematic for providers, using too little can be a bit of a red flag as well. The former may be a problem due to the idea that you may have too little cash, while the latter implies that you may lack experience at managing debt.
To get a credit score that is “just right,” be sure that you do not go above 30 percent. Don’t try to ride the line; instead, try to avoid using little to none of your credit without going overboard. Look into responsible ways to utilize your credit more in this case. If you utilize too much of your credit, however, you should try to get your debt paid off. Additionally, you should have fewer credit cards, which lowers how much of a credit rate you have available.
Your application is incomplete
When you file your small business loan application, you need to double and triple check that you did everything correctly. Some loan providers may be harsher about any procedural issues, leading to said denials. Be sure that, in your application, you include all relevant documentation, including your credit information, business lease, personal identification card, tax returns, bank statements, and more. Your lender should provide a list of documentation they expect you to include in your application. The more information you include that pertains to you and your business, the more likely your application is to be approved.
Little or no proof of cash flow
If your application either doesn’t demonstrate adequate cash flow, or if the provider determines that the cash flow is insufficient, this may be why your loan was denied. It’s one thing to be in between cash flows, where a small business loan may be adequate to help you weather that storm. It’s an entirely different thing, however, to be asking for such a loan if you are hoping it could be your magic ticket to getting that cash flow. Additionally, if your cash flow is too inconsistent, a provider may deem that you are too much of a liability.
Lenders are not a charity, so you shouldn’t expect them to stick their necks out for you if there’s no evidence that your business has the potential to get enough cash flow.
A lack of adequate collateral
One thing that may be used as part of the loan process is for the loan receiver to put something up as collateral. Any number of things can be put up as collateral, assuming it has value that can be used to recoup losses if you are unable to pay the debt back. This may come in the form of commercial real estate, business properties, equipment, vehicles, and more. If you don’t have anything you are willing to put up as collateral, or if what you are offering is insufficient to potentially cover the provider’s expenses.
A lack of business experience
If you are relatively new to owning a business, or even just working in your respective industry, the lenders may feel like there is simply not enough to justify taking the risk on you. Sad though it may be, there is a lot of risk associated with being too new, as proven by how many new businesses tend to fail compared to the success stories.
Now, granted, being told you just need to have more business experience is not great to hear when you’re trying to keep your business alive for longer. After all, for many, the loan is meant to keep them afloat long enough to clear that hill. Nevertheless, it is a reality of what lenders expect from small business owners who hope to borrow from them.