You've gone through the grueling process of applying for a small business loan through a traditional bank. You've waited a fairly long time for a decision. And finally, they respond; they've come back with a disheartening "no." But why? You thought you had all your ducks in a row. What went so wrong that they ultimately turned you down? Below we've listed seven of the most common reasons why banks say no when it comes to small business lending.
1. Credit score
For banks, this is a big one. If your credit score doesn't hit their benchmark, it's likely your application won't make it very much further. They look at all aspects of credit history, to include your personal score. As the business owner, they figure that if your own credit score is less than ideal, what does that say about your financial management skills.
At this point, it may make sense to take some time, review your credit report carefully and address what you can to try and improve your FICO. It doesn't occur overnight, but there are ways to work on raising that score.
2. Not enough years in business
Generally speaking, banks like to see at least two years in operation before approving any sort of business loan. And even then, they may be on the fence if it's only been a couple of years. They are basically looking for a track record, for some assurance that the company is going to continue to remain in business long enough at the very least to pay back the loan in full. With only a year or two in business, there isn't enough evidence in their eyes to suggest longevity and sustainability. There are lenders out there who will work with newer businesses. Just keep your books in order and do a little research as far as companies that are willing to loan to newer small businesses.
3. You fall into the risky category
Unfortunately, banks do identify certain types of businesses as riskier than others and thus, they represent far less of a secure bet when it comes to commercial lending. Restaurants, for example, are one such industry that banks are hesitant to invest in. They tend to fail at higher rates than other businesses.
4. You lack collateral
Without the right kind of collateral or enough of that collateral, there's a very good chance a bank will, in fact, turn you down for a loan. There's probably little you can do in terms of rectifying the collateral situation. And so this is where you want to start to do some legwork and go out and look for those lenders who understand your situation and are willing to work with you.
5. You don't have strong cash flow
A bank will most definitely look at your cash flow situation. They are trying to determine whether or not you have enough coming in versus going out to cover not only your current expenses but the cost of the loan on top of it. Without strong cash flow, you're almost guaranteed a no.
And it's not only that inadequate cash flow will garner you a loan rejection, but it's also a sign that your business could be in a bit of trouble. You might want to take some time and look at absolutely everything related to your expenses and incoming revenue and see where the problem seems to be occurring.
6. You've asked for too little of a loan
With traditional banks especially, it's almost not worth their time to deal with smaller loan amounts. Anything under 100k, and you usually run into roadblocks when it comes to trying to procure financing from a bank. Particularly if you are applying at a major bank, they almost will never deal in amounts under six figures. You can, of course, go for a larger amount, but then there's, of course, the question of do you qualify for this larger amount? And can you even handle a larger business loan? Again, there are lenders that will work with you on a smaller loan product.
7. Incomplete paperwork
Banks will bury you in paperwork. They will request mountains of documentation, so much so that it is not hard to lose track. And sadly, a common reason why loans are rejected is that forms are missing, applications are incorrectly filled out, there are absent financials, you name it. A typical bank loan, as far as the application process goes, can take a business owner up to 30 hours just to assemble all the right pieces. They will ask you for tax returns, business plans, all financial statements, legal documents, relevant contracts, leases, any corporate documents. If you fail to produce anything they ask for they will reject you.
Getting rejected by a bank can be a hard pill to swallow. This is why so many small businesses are starting to lean toward alternative and online lenders. They make the process so much easier, and are more often than not, willing to take a chance on those companies they believe in, regardless of scores or collateral. At First Union Lending, we are looking for reasons to say yes! Call today and let's get started together.