Author: Blake Brown
Blake is a member of the Business Growth team at EquityNet.
When applying for a business loan, lenders will consider a number of different indicators of your creditworthiness. Because hard credit pulls can make it harder to get approved in the near-term future, it is important to make an informed decision when deciding how to apply for a small business loan. While the requirements will be different for every lender and loan type, there are many ways to hurt your chances of getting approved. Here are some of the most common mistakes business owners make during the application process.
1) You don’t make an honest assessment of your credit score
Your credit score will heavily influence most lenders decision to give you a business loan. Both your personal credit score and business credit will be taken into account, despite the loan being to your business. You should make an honest assessment of your credit score, to better understand what types of loan you would qualify for and the expected interest rates. If the interest rate would be too expensive to service, then your business cannot get a loan and you should seek out other sources of financing.
2) You don’t plan ahead
An intrinsic and critical part of running your business is having a plan for the future. Understanding your financing needs in advance of the need being pressing will help you on many levels.
First, you will not be forced into taking short term loans with high interest rates. This will consequently damage cash flows and damage your ability to obtain lower cost long term loans. Second, if you don’t have the financing you need to take advantage of growth opportunities, your company’s cash flows will take a hit. Third, most businesses revenues fluctuate throughout times of the year. Lenders want to see improving revenues, so it is important to seek out financing during your higher revenue months. Waiting until the lean months will decrease the chances of getting approved, particularly for low-interest SBA loans.
3) Your documentation is disorganized
At the end of the day, the lender will make a decision on your creditworthiness. While the numbers have to check out, having a sloppy presentation can hurt your chances of approval. If your accounting processes are disorganized and poorly represented, this gives the lender qualitative data about how you run your business. In addition, the lender is a human, make their life easy and they’ll appreciate it!
4) Your financial statements don’t show room for more debt servicing costs
For both personal and business credit cards, if you are making the minimum payments and unable to pay off more debt, it is unlikely that you will be able to pay back more per month. Without a clear way to cover the debt expenses, the lender is unlikely to have faith that you will be able to pay back the loan.
5) You apply during a period of decreasing profitability
The time to seek out a loan is not during your lean months. Lenders want to see growing revenues in the recent past, and have confidence that you will continue to grow. While there are certain circumstances mostly out of your control, such as inventory being lost due to a third party distributor or recalls from your manufacturer, it is normally possible to forecast cash flows and get your company capitalized while cash flows are strong. This is particularly important for seasonal businesses and companies with a small number of customers who order high volume on a somewhat unpredictable basis.
6) You don’t have a clear handle on future growth opportunities
Just like an equity investor, the lender will want to see a compelling and realistic case for the future of the business. Not only will this reassure the lender that you will be able to service the loan, it can excite them about growing their relationship with you. Many lenders like to grow their relationships with their clients, and give access to more credit over time. As you build a working relationship and deliver on your growth plans, they can lend more capital without spending on customer acquisition and further due diligence costs. Prior to seeking capital, come up with a defined plan for allocation and understand how you will deploy capital to deliver on those initiatives.
7) Reapply to lenders that have declined you in the last 12 months
There are many lenders that cover similar spaces and will lend to similar parameters. If you get declined, they will see it on your file and be more likely to decline you again. This can ding your credit score and inhibit your ability to get loans elsewhere. Instead, you should connect with an online advisor that will help you navigate your options without hurting your credit score.
8) Using personal credit cards instead of business credit cards
Many business owners, particular in early stages of their business, facilitate working capital using personal credit cards. There are several disadvantages to this, which include making it more difficult to secure a loan - 30% of your FICO score is based on your debit to credit ratio. Separate your business liabilities from your personal by setting up a formal legal entity and applying for a business credit card.
9) There are bankruptcies or defaults on your credit report within the last 7 years
Unfortunately, there is not much you can do about this one. A bankruptcy or default will stay on your credit report for a period of 7 years. During this time period, it will be very difficult to get a loan that is not heavily collateralized. Even then, it will be tough to get a loan with reasonable terms. If you have a bankruptcy or default on your credit report in the last 7 years, the best path forward is to get business partners with strong credit histories.
10) You have been in business less than 6 months
Without collateral, small business owners have a tough time getting a business loan. Without an operating history, banks have a difficult time assessing your creditworthiness. There are many other financing options to consider, but many business owners can creatively structure their business to be capital light in the early stages. It helps to find a niche market that you can saturate quickly, and develop a steady revenue stream from the client base. With a track record of success, a bank is more willing to give you a loan to grow.
What to do if you were declined for a loan
If you are declined from a loan, be sure to get clear feedback on why you were declined. Most lenders are happy to provide you this detail, as it is to their benefit if you can correct the issue and come back as a strong lending candidate. Just like you want to grow your customer base, banks are looking to grow as well. However, they have underwriting standards that their management team and shareholders expect of them.
Business is always unpredictable, but being prepared and knowing your options can help you secure a loan.