If you’re a small business owner, chances are you’ve considered taking out a small business loan to help your company grow.
If you haven’t yet, it’s something to think about: borrowing money can be a great way to spur growth and give your business the additional capital it needs to expand or diversify.
However, not every applicant will be approved for a loan. There are many reasons why an application might get denied, and the better prepared you are for this possibility when applying for funding, the more likely that you’ll be able to successfully navigate the lending landscape.
Here’s what to consider before applying for a small business loan — and what could happen if your application is rejected.
Your business is still very young.
When considering a business loan application, lenders will look at several factors to decide whether or not to approve the request.
One of those factors is your company’s credit history, which includes your payment history and overall credit score.
If you’re still in the early stages of starting up your business, it can be difficult for lenders to trust that they’ll get paid back if they lend money to you now.
If you’re just starting out and hoping for a little extra capital infusion, here are some things to keep in mind:
Your business needs at least one year under its belt before applying for a loan.* You’ll need an established track record with no recent defaults on bills or commitments other than rent/mortgage payments.* Don’t bother applying unless you have a track-record.
You don’t have a strong credit history.
When applying for a business loan, you need to show that you have been able to repay previous loans and maintain a good credit rating. If your credit score is low, lenders may hesitate to lend you money.
To improve your chances of being approved for financing, work on building up your personal or business credit score before starting the application process.
To learn how to increase your overall rating and find out what makes up a good one, schedule a consultation with us by clicking here.
You’re not able to show that your business earns a profit, or has a history of profits.
When a business is profitable, it’s able to make a profit after paying its expenses. A business that doesn’t earn a profit is considered unprofitable, and may be unable to qualify for any type of loan or other financing.
If you’re applying for a loan to purchase equipment that will help your company grow, having proof of historical revenue growth can help the lender determine whether or not they believe your business will be successful with the new equipment in place.
If instead you are requesting funds for working capital purposes (such as purchasing inventory), then showing that you are able to maintain revenue stability over time is key because it indicates longevity within the market and ability to repay debts on time.
As with any type of loan, the bank wants to know that you can repay it. If you don’t have enough revenue yet, the bank will likely turn you down. You need to show that your business has a history of profits and that there is a plan for increasing future revenue.
If you’ve been in business for more than a year but aren’t making much money yet, then you may be able to get a small business loan by using one or more personal assets as collateral. But if this is not an option for you, then the best thing to do is wait until your company has grown enough so that its finances are strong enough for getting approved for financing or issue a promissory note to someone who trusts you.
Your company’s net worth may be too low.
Net worth is the amount of money your business has in assets minus the amount of money it owes. If your net worth is low, this can hurt your chances of getting a loan because lenders want to be sure you have enough cash on hand to repay their loans.
Your company’s net worth will be affected by its credit rating and other factors, such as whether or not it’s new. For example: if you’re just starting out and have no income coming in yet, then it might be hard for a lender to see how they would get repaid — and therefore they may deny your loan request because they don’t think you’ll be able to pay back their loan!
You don’t have collateral.
The majority of loan applications require the applicant to pledge collateral, or something of value that can be used to secure a loan.
If you don’t have any assets that could be used as collateral, then it’s unlikely your application will get approved. This is because banks don’t want to give out loans on risk alone. They need something in return for their money — something that will make it worthwhile for them if you default on your payments and end up losing everything anyway.
But if you do have assets and money invested into a business, all bets are off! These are perfect examples of things that can be used as collateral: houses (if they’re paid off), cars (if they’re paid off), boats (if they’re paid off), businesses’ assets like equipment or inventory…and even other types of personal property such as artwork or antiques because these items may have monetary value above their original purchase price due to rarity or popularity among collectors.
You have too much debt already.
You have too much debt already.
It’s important to understand what your current debt levels are in order to determine if you will be able to handle a new loan.
If you’re already maxed out on your credit cards, it might not be feasible for you to get another loan without putting your other financial obligations at risk.
However, if that’s not the case and you’ve been doing well managing all of your other debts, having more debt may actually be helpful! Your business can use its profits for growth and expansion instead of paying off loans or interest payments on them.
Additionally, having collateral makes it easier for banks and lenders to approve additional funding because they know it won’t disappear overnight like credit card balances tend to do when there aren’t enough funds available after paying bills each month (which is why people often end up with late fees).
You don’t have a well-developed business plan.
If you want to get a business loan, you will need to have a well-developed business plan.
A business plan is a detailed document that describes your business goals and the strategies you will use to achieve them. A good business plan helps you make better decisions about your business, communicate your goals to others and attract investors.
A good example of a well-written and thorough plan is the one prepared by Brad Feld for his company Mobius Venture Capital (now known as Foundry Group). He wrote about this in his blog post “How To Write Your Business Plan”:
Invest more resources in your business.
If you’re wondering how to get business loans, the first step is to make sure that you meet all of these requirements.
Some lenders may be willing to overlook certain factors (such as small size or lack of collateral), but they will only do so if your other qualifications are really strong. It’s also worth remembering that each lender has its own specific criteria for what makes a borrower eligible or ineligible for financing — and unfortunately, there’s no easy way to determine these standards from outside the institution.
So how can you put yourself in an ideal position for obtaining business capital? By working with a reputable funder who understands your needs and offers fair terms tailored specifically towards meeting them.
You’ll want someone who doesn’t just offer conventional loans at high rates when it comes time for repayment; instead look for someone who sees past risks by looking at potential opportunities too!
