4 reasons your small business can’t get a loan

By Brooke Chaplan

As your business grows, you may find yourself needing more capital to better accommodate your clients and needs. But what do you do when you just can’t seem to get a loan? Obtaining a loan when you own a small business isn’t always guaranteed. There are lots of reasons that your loan application may have been denied. Here are four common reasons you may struggle to get a loan and how to overcome them.

Lack of experience

If your business hasn’t been around very long or you’re in the startup phase, it can be more difficult to get a loan. This is because a bank wants to know that you’re a safe investment. They don’t want you to close up shop after they’ve given you a loan because this can mean that they won’t get their money back.

For businesses that have a history of less than one year, this can prove to be problematic. You may have to secure a higher interest loan or provide more documentation for why you’re a good investment. You may want to include documentation of your financial projections if you don’t have an extensive history of profit yet. This will show the lender of your potential earnings. It also helps to do your research; learn what the specific qualifications and requirements are for the lender you are applying to. Some lenders offer flexibility, but the more you adhere to their minimum requirements, the more likely you are to get a loan. Online lenders are typically more flexible and easy to qualify for, though the loans are often more expensive.

Inconsistent cash flow

A bank wants to know that you’ll be able to pay your bills in a timely manner. If you don’t have a history of strong cash flow, you may find yourself being denied for that loan. This can be extremely difficult when you’re in an industry that’s more seasonal in nature. Submit your loan application with this in mind so you can secure the loan you need. Show the bank you need this money to create a more consistent flow of cash by developing a strong business plan. Your application will be stronger if you have a wide range of legal documents in order, including your personal and business tax returns, your bank statements, any previous leases or loans, business licenses, and a resume showing relevant experience.

Little collateral

Another common reason for loan rejection is that your business lacks enough collateral to secure that loan. Collateral can include assets such as inventory, equipment, or real estate. You may have to put up personal items in order to have enough collateral to cover the costs in case you go into default. Make sure your business plan has a reasonable chance of success before you put your personal finances on the line. You want to grow your business in a manageable and reliable manner. You can also offer a blanket lien of your business assets to recoup the loan if you can’t pay it back.

Low credit score

A low credit score is often the bane of many start-ups when it comes to being able to get more credit. This is something that can be boosted if you take the right steps. For example, secure a loan for a smaller amount so you can start to establish your business credit. Carry the loan for at least three months and then pay it off. Doing this shows that you’re serious about staying in business.

Also, be sure to pay off any previous loans you may have, and pay all your bills on time. Once a year, you can get a copy of your personal credit reports through AnnualCreditReport.com, completely free of charge. A small business that is more established can check out their business credit scores through a credit bureau website, like Experian or TransUnion. As a general rule, although credit scores are important, many lenders place more emphasis on current cash flow and your previous track record than they do with your credit score.

Launching a successful business often means that you need to borrow. Use these tricks so you can secure a business loan without having to leverage your personal finances. Understanding the requirements, knowing how to boost your credit score, and putting in the effort to qualify your experience and maintain cash flow will all assist you in getting that loan you need. So review your documents, make sure you understand what your lender is looking for, and apply again.

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Brooke Chaplan is a freelance writer and blogger. She lives and works out of her home in Los Lunas, New Mexico. She loves the outdoors and spends most of her time hiking, biking, and gardening. For more information, contact Brooke via Facebook at facebook.com/brooke.chaplan or Twitter @BrookeChaplan

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