Securing a small business loan can be an incredibly frustrating process. The application process with a traditional bank loan can include weeks of paperwork and processing, and the smallest mishap can put your loan on hold –or worse- it can get denied.
For some small business owners, this can be debilitating to business owners that need collateral immediately. In fact, 27% of small business owners were unable to obtain adequate financing as of December 2015, causing 31% of that group to be unable to expand business operations and 10% were unable to increase their inventory.
Here are the five most common reasons why your business loan was denied with a traditional bank.
If you are applying for a new line of credit, most banks will want to see some sort of collateral. The SBA defines this as an additional form of security that can be used to assure a lender that a second source of loan repayment could be used, such as real estate, equipment, savings, and more. If you do not have any collateral to back your loan, a bank will be much more hesitant about lending money because it’s a high-risk deal.
Another issue with collateral is the depreciation value. Just because you have a large piece of machinery that was purchased at $100,000 doesn’t mean it will still be worth that much a few years down the road.
Your credit history will influence your chances of approval for any loan; however, with a business loan, both your business and personal credit will be considered. Credit scores are represented in a numerical value to give lenders a quick and dirty way of understanding your credit risk. If you have a credit score below 600, chances are your loan application will get denied.
You can use a free business credit monitoring service to check your business credit score or personal score. If you still need to build your business credit, however, check out these four methods on how to build business credit.
Limited Cash Flow
It’s a no-brainer that banks won’t lend to any business that has limited cash flow. They may even deny your bank loan if you have inconsistent cash flow, which really affects seasonal businesses. Banks will also require one full year of bank statements, but a loan with an alternative lender would only require three months’ of bank statements.
Lacking Time in Business
Start-ups have the hardest time securing business loans because they have no history. There’s nothing to show the lender; no bank statements and no established business credit. Most start-ups access collateral by investors or by investing their own money up-front. If you’ve been in business less than a year, you’re much better off working with an online lender.
No Business Plan
You must have a strong business plan in place for a bank to look at. This plan should include your projected financial statements, such as profit and losses, cash flow, and a balance sheet. The more prepared and logical your plan, the better off you’ll be (assuming all other requirements are met). To put it simply – a bank is only going to be as confident in your business as you are.
Save Time With an Alternative Loan
If you’re looking to take out a small business loan, but think you could get denied for one of the five reasons listed above, you should definitely consider taking out a business loan with an alternative business loan provider. After all, the online banking industry stemmed from the collapse in the economy as a way to help SMB’s get the funding they needed when traditional banks stopped lending money.