Have you ever applied for a business loan only to find out that you were denied? If so, you’re not alone. Thousands of small business owners apply for business loans every year, only to be turned away due to a variety of reasons. In this article, we’ll cover 8 factors that keep you from getting a business loan and what you need to know in order to increase your chances of success. We’ll discuss how to craft a business plan that appeals to potential lenders, how to improve your credit score, and how to show lenders that you can afford loan payments. By understanding these 8 factors, you can increase your chances of getting the financing you need to grow your business.
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What is a business loan?
A business loan is a type of financing that’s designed to help you start or expand a business. These loans can come from banks, credit unions, and other financial institutions. Business loans are also available through peer-to-peer lending networks. You can also use a business line of credit as a source of financing for your business. While a business loan is a single payment that’s due in full, a line of credit is a source of funds that you can tap into as needed. You can draw from the line of credit up to a set amount. But once you go beyond that, you need to repay the entire amount.
Business loans are typically awarded based on a lender’s assessment that the business is a sound investment with a relatively low-risk of default. For example, a business owner might apply for a small business loan to fund the purchase of new equipment needed to expand the business. Or someone might apply for a loan to buy a car needed to provide delivery service for the business.
Reasons why people are denied business loans
There are a number of common reasons why businesses are denied loans, including:
- A Poor Credit Score – Although business owners might have a strong record of paying their bills on time, there are times when their business might have trouble paying its debts. When that happens, a business credit score can take a hit, making it more difficult to get a loan in the future.
- A Lack of Collateral – Most business loans are unsecured loans, which means the lender has no legal claim against the borrower’s assets if that person defaults on the loan. If a business owner has assets that the lender can seize and sell if necessary, the lender may be more willing to offer a loan because there’s a greater chance of getting repaid.
- A History of Late Payments – A good payment history is important when you’re trying to get a business loan. Lenders want to see that you’ve paid other bills on time and that you’re reliable when it comes to making payments.
Crafting a business plan that appeals to lenders
A business plan is a written statement that details your business model, the financial details of your business, and what you plan to do with any funds you are hoping to get from a lender. A business plan is critical to securing a business loan. When lenders review your loan application, they’ll likely ask for a business plan as well. Writing a business plan may seem like a lot of work, but it’s a great way to figure out the exact steps you need to take to grow your business.
- A Good Business Plan Will Help You: Identify your customers and their needs – You’ll need to know who your target audience is in order to create a product or service they’ll want to buy.
- Create a Marketing Strategy – Marketing is key to getting your product or service in front of your customers. Your business plan should include a strategy to market your product or service.
- Put Together a Financial Forecast – You’ll need to forecast how much it’ll cost you to start or grow your business, as well as how much you’ll make. Your financial forecast can help you determine how much money you’ll need from a lender.
Improving your credit score
A business loan application will likely include a request for your credit report and credit score. While lenders don’t have to disclose their reasoning for this, it’s likely that they are looking for reasons to deny your loan application. It is also possible that they are trying to find ways to lower the interest rate of your loan. In order to increase your chances of getting a favorable decision from a lender, you should try to improve your credit score. You may be aware that there are many ways to improve your credit score, but not all are effective.
Some of the most common ways to improve your credit score involve paying down debt and choosing the right credit card. With regards to paying down debt, it is important to note that paying off a credit card account is not going to help your score. Instead, you should focus on paying off your high-interest debts first. After you have paid them off, it will be much easier to get approved for a business loan. It is important to remember that paying off an account will only help your score if you do it with the same card.
Choosing the right credit card can also help improve your score. For example, choosing a credit card with a low interest rate can be a smart way to start paying down debt. You can also consider having one credit card for emergencies and another for regular expenses that contribute to your credit score.
Proving You Can Afford Loan Payments
As part of the loan application process, lenders will seek information about your assets and liabilities. This information can help them determine if you have the means to repay the loan. A general rule of thumb is that you should aim to keep your total monthly obligations at less than 36% of your gross monthly income. To do this, you may need to make some sacrifices and figure out where you can cut back on spending. One option is to apply for a less expensive loan. Another option is to put down a deposit that will be applied toward the cost of the loan. For example, you can offer to put down 10% or 25% of the total amount you want to borrow. This will lower the total amount you have to borrow and make it easier to meet the minimum monthly payments.
Demonstrating the Value of Your Business
One common reason why lenders may deny your loan application is that they have doubts about the future of your business. In order to overcome this, you can use financial forecasting to demonstrate that you have a viable business model that will be profitable in the future. You can also try to negotiate a lower interest rate on your loan based on the value of your business. For example, you can tell the lender that you will use the funds you borrow for marketing purposes. You can show them that this is a cost that will be part of your overhead, therefore increasing the value of your business. You can also try to offer collateral as security for the loan. For example, you can offer to pledge the intellectual property rights to your product or service as collateral. Doing so can help lenders feel more confident that they will get repaid.
Showing Collateral
While lenders generally don’t require collateral, it’s possible to get a loan with collateral. One place you might be able to find collateral is on a peer-to-peer lending site. Some peer-to-peer lending sites allow you to borrow money against the value of certain assets such as stocks, bonds, or real estate. It’s important to note that these loans typically come with higher interest rates. If you choose to go this route, be careful to fully understand the terms of the loan before signing on the dotted line. Another place where you can get a loan against collateral is at a traditional bank. Again, these loan terms will typically come with higher interest rates. You may be able to get a lower interest rate if you can prove the loan will be used for business purposes.
Seeking Alternative Sources of Financing
When your business loan application is denied, it’s important to keep an open mind and not get too hung up on one particular lender. Keep in mind that there are many different types of financing available. You may be able to find a loan from a different type of lender that will be easier to get approved for. For example, you may be able to get financing from a friend or family member. Or you may be able to get funding from an online alternative funding source such as a peer-to-peer lending site. Before you choose any source of financing, be sure to read the fine print and make sure you understand all of the terms and conditions. By exploring alternative sources of financing, you’re more likely to find a lender willing to.
