As hard as it is to come to terms with disappointment, being turned down for a small business loan is not the end of the world. In fact, if your business is not a good credit risk, there is actually fairly good news in the no answer. More debt solves problems only when profit can be turned eventually, sooner rather than later to pay off all the loans that are bringing down your credit rating. When a creditor denies your application, it is important to investigate the reasons for that denial so that you may remedy detrimental situations and improve your ability to get loans in other ways as well.
Reason # 1: A Poor Credit Rating
Every loan for which you ever apply will cause your credit rating to be considered. The credit rating is the number one way bankers and other potential lenders have of knowing whether or not you and your company represent a reasonable risk to take. Becoming overloaded with debt, missing payments, defaulting on loans, and applying for credit cards frequently can affect your credit rating. To avoid having your personal credit too closely identified with your business credit, it is important to keep the two as separate as possible. All lenders will consider your credit rating as well as that of your business, but if a business is performing well and meeting its financial obligations, your past will be of lighter consequence.
Reason # 2: Hard to Launch a Startup
Launching a new business is hard work, and one of the most challenging aspects any new owner faces is securing a small business loan. With little financial history to consider, lending institutions have to consider the owner’s personal credit history more carefully than they might if the business’s credit history had many successes to show. While business owners might feel compelled to note greed in the bankers’ hearts, the truth is that banks are used to witnessing the failure of startups. Most new businesses fold at younger than two years of age, and banks—like other businesses—need to know their money is safe.
Reason # 3: Poorly Presented Business Plans and Financial Statements
As with a resume, your business plan and financial statements are your one true chance to shine for lenders when applying for a small business loan, especially if yours is a new business or one set to launch. Taking special care with your business plan, understanding each step of launch and every expense, and presenting accurate, honest, and well-described financial statements will help to develop both a rapport and a beneficial level of loan confidence between you and your potential lenders.
Once you’ve identified the possible reasons your small business loan request was denied you can try again.