Factors That Keep You From Getting Small Business Loans

Last Updated on February 8, 2024

Getting a business loan for a small business is a smart way to get a cash influx. These loans can be used for large purchases, growing funds, covering operating expenses, etc. Business loans have many benefits, but they can be difficult to get approved.

Many lenders have very strict requirements and only certain businesses can qualify. This is especially true if you are seeking loans from traditional lenders such as banks. The bank is notoriously strict, approving only 28% of the small business loan applications it received in 2019.

When looking for a small business loan, be prepared for possible obstacles. Learn the top factors that keep you from getting a small business loan and how to avoid them.

First, let’s learn the types of small business loans you can apply for

A small loan can help if you are a small business owner who needs access to cash. But choosing the right kind of loan is very important. Choosing the wrong loan can make you wait months to get the money you need right away, or end up with the wrong type of loan offer. Here are a few types of loans, you can apply for, depending on the criteria

1. Term loan

A term loan is one of the most common types of small business loans and is a lump sum of cash that you pay back over a period of time. Monthly payments are usually fixed, and interest is added to the principal. Term loans are flexible to meet different needs, such as everyday expenses and devices.

2. SBA loan

Small Business Administration (SBA) loans are attractive to business owners who want affordable government-sponsored loans. However, SBA loans are notoriously slow in the application process, which can delay funding. It can take up to three months to receive and approve your loan. If you don’t need cash right away and want to take advantage of lower interest rates and fees, an SBA loan is for you.

3. Business credit line

Similar to credit cards, business lines of credit offer borrowers a revolving credit limit. This is usually accessible through your checking account. You can use up to your maximum credit limit, pay it off, and then withdraw more money. These options are great if you don’t know the exact amount you need, as interest only applies to the amount you withdraw. This is compared to a term loan, where interest must be paid on the entire loan regardless of whether part or all of it is used. Many business loans are unsecured. This means that no collateral is required.

Read: What are the Top Funding Options for Startup Ventures?

4. Equipment rental

If you need to finance a large appliance purchase but don’t have the required capital, consider an appliance loan. These loans are designed to help pay for expensive machinery, vehicles, or valuables such as computers and furniture. In most cases, the purchased equipment is used as security in case you are unable to repay the loan.

5. Invoice factoring and invoice financing

Business owners struggling to get payments on time should consider invoice factoring or invoice financing (also known as accounts receivable financing).

Invoice factoring allows you to sell your outstanding invoices to your lender and receive a percentage of the invoice amount upfront. Invoice finance allows you to prepay outstanding amounts using unpaid invoices as collateral.

The main difference between the two is that factoring allows the company that purchased the invoice to manage the collection of the payment, whereas financing requires the payment to be collected so that the amount borrowed can be repaid.

Read: Single-Payment or Installment Loan: Which Suits Your Financial Needs Best?

Here are seven factors that can hinder you from getting business loans:

1. Poor credit history

Some lenders place a high value on your credit history, which shows your past payment history, the amount borrowed, etc. Your credit history tells lenders whether you can trust them to repay small business loans on a timely and consistent basis.

Most lenders want to verify the creditworthiness of both individuals and businesses. If your business is fairly new and you don’t have an established credit history, you may consider your personal credit history to be more important.

To get a small business loan, you need good credit. If your score is above 700, you may be eligible for lower interest rates or more favorable terms.

However, if your credit score is below 700, getting a small business loan becomes even more difficult. In this case, you should work on improving your credit score before applying. You can explore other financing options or work with fintech marketplaces like National to find solutions with no creditworthiness requirements.

2. Limited cash flow

Cash flow is a measure of the amount of money flowing in and out of a business at any given time. It is essentially an indicator of your income and expenses. It is also important in the day-to-day operations of our business.

Lenders want to know if their business has enough cash flow to cover day-to-day expenses, handle unexpected disruptions, or make loan payments.

If your business has limited cash flow, it’s a signal to lenders that you are particularly risky and may not be able to secure funding.

3. Weak business plan

A business plan is a formal statement of your business goals and how you will achieve them. Not all lenders require you to submit a business plan as part of your loan application, but some banks, especially banks, do.

Lenders will want to know that their money is being spent wisely. This means assessing the feasibility of growth strategies and analyzing whether the company’s activities are profitable.

Be sure to explain why your company wants the loan, how you plan to use the money, and how you plan to repay it. Your business plan should include your desired loan amount along with other important information, such as:

  • business overview
  • Market Overview
  • business goals
  • Profitability forecast
  • Business finance (balance sheet, cash flow statement, expenses, etc.)

Please use it as a reference for making a solid business plan.

4. Too many applications for business loans

It may seem tempting to apply for multiple business loans from different lenders at the same time. You might think that this increases your chances of getting approved and gives you the chance to choose the best deal. Unfortunately, too many loan applications actually do you a disservice.

Applying for multiple forms of financing will lower your credit score, and lenders will stop considering you. If you’re worried about getting the best small business loan for your qualifications, try a fintech marketplace like National instead.

5. Incomplete financial and legal documents for business loans

Lenders require a number of financial and legal documents when evaluating a business and deciding whether to approve a business loan. Details vary by lender, but it can help you be prepared to provide:

  • Balance sheet
  • personal and business bank statements
  • Individual and corporate tax returns
  • loan history
  • Proof of collateral (if you want an asset-backed loan)
  • Driver’s license or ID card
  • Accounts receivable report
  • Legal documents, including business licenses, registrations, and franchise agreements

Small business loans are less likely to be approved if important financial and legal documents are missing. Misrepresentation of information or an inadvertent oversight can damage your application.

Take the time to organize all your documents and prepare for your presentation. Check everything and make sure there are no missing pieces of information or errors.

6. Go to work alone.

Applying for small business loans from traditional lenders, especially banks, requires a lot of preparatory work. The process can be time-consuming and even stressful as mistakes affect your chances of getting approved.

helps consult with team members and other business advisors throughout the process. You can ask your employees to help you with specific tasks, such as drafting documents or creating a business plan. You should also check important information with your accountant, legal department, or business partner.

If you’re not sure where to go for professional advice, check out the Small Business Administration’s own mentoring and educational resource, the Service Corps of Retired Executives (SCORE). Connect with retired business people and get personalized help with finances, growth strategies, and everything else.

7. Disorganization

Before approaching potential lenders, business owners need to get together. This means that you have all the documents required for your loan application on hand.

“One of the problems he can have when applying for a loan is if the business owner doesn’t have the documents the bank requires,” Steck said.

Required documents often include a detailed business plan and proof of collateral. Extensive financial records such as income tax returns, personal and business bank statements, credit histories, balance sheets, and more Legal documents such as franchise agreements, business licenses, and registrations

There are many resources that entrepreneurs can use to prepare their loan applications. For example, the Small Business Administration provides a very detailed loan application checklist for borrowers. Leveraging these resources can reduce the chances of looking confused or unprepared.

Transient errors cause the application to be rejected.”Completing an application form incorrectly or omitting information is another common mistake that can result in an application being rejected,” Tayne said.

Tain also noted that careless bookkeeping and inconsistent business practices, such as mixing business and personal bills and not filing tax returns, can hinder fundraising. pointed out. She recommends taking the time to gather all the required information, filling out the form completely, and reviewing it before submitting your application.

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