Mar 29, 2013

Small Business Loans: Why They Said No

Applying for a small business loan can be a stressful undertaking, even if you’re as prepared and qualified as you can possibly be. So when you go through all the work and red tape to apply for a loan and you don’t get approved, it can be disheartening, to say the least. One way to avoid finding yourself in that position is to know the common reasons why people get turned down for small business loans before you apply, so you can avoid falling into any of these categories. The following is a list of reasons why you might not get approved for a loan:

You haven’t been in business long enough
- As a general rule, lenders want to see small businesses functioning for a good three years before approving them for a loan. This gives companies time to amass enough of a history to demonstrate growth (or lack thereof), and for business owners to prove that they are committed to the endeavor (no one wants to put their money behind a business whose owner is going to lose interest and flake out in 6 months.) One of the most common rejection lines small business owners hear: keep going and come back later. Obviously, having a loan would make those first few years easier to get through, but focus on the bright side: not only does having a bit of history make your company more attractive to lenders, it gives you time to get to know your own business, which will help you better allocate and direct loan funds once you do get approved.

Your small business isn’t making enough money
- No-brainer, right? It’s one thing to have a detailed plan showing lenders how a small business loan will bolster your business and lead to increased revenue, but not being able to be the biggest, best version of your company doesn’t excuse you from the burden of proving your financial solvency. Lenders want to see that by your own expertise and sweat, you’ve been able to make money with your business, as opposed to waiting on an infusion of capital to make that happen.

You’re in the wrong industry
- It’s important to do your homework about a lender before you meet with them. Not all lending institutions issue loans to small businesses in every industry. It will serve you well – and make less work for you – to approach banks and lenders who have a history of backing companies in your industry.

Your credit isn’t good enough
- This isn’t the most common reason why people get turned down for small business loans, mostly because individuals with poor credit tend to anticipate getting turned down and elect not to go after a small business loan at all. If you have an ghosts in your credit closet, it’s a good idea to deal with them before going after a loan.

Underdeveloped business plan
- The importance of having a completely developed business plan cannot be undervalued. This is true when it comes to addressing any part of growing your business, but especially when you’re trying to drum up capital, whether through a small business loan, or through investors. Anyone who is trying to assess whether or not to put funds behind your company is going to want to see evidence that not only is there a comprehensive plan going forward, along with market analysis, but that you are the kind of business owner who is diligent, organized, and invested enough to have a business plan at all. In this way, your business plan works doubly in your favor: once for the merit of the actual information it contains, and again just by its existence.

Not enough personal investment
- Lenders want to see that your business is viable financially, that you have great awareness of your market, a solid business plan, and prospects for growth going forward. But even with all of those pieces in place, lenders count personal financial investment as one of the most important signs of faith that a small business owner can demonstrate. After all, if you don’t believe in your company enough to put your own money behind it, why should the bank?