5 Ways to Get Turned Down for a Small Business Loan

Getting a successful loan application isn’t any different from a job application. You need to put work into the application to make it look good and accepted. There are a few small mistakes that loan applicants can make. To help business owners avoid this, there is a list of things or ways that can get loan applications turned down.

• Sloppy books

 Having shoddy books when applying for a business loan isn’t a good idea. The lender will do their due diligence and will ask for financial statements and balance sheets. Shoddy records are a sure way to get a loan application turned away.

You need to ensure that your books are clean, in order and easy to read and understand. If needed, you can have an outside accountant or financial advisor go through the books and documents to make sure that they are correct and presentable. This is a good practice for business and helps your loan application.

The bookkeeper or accountant you engage must be aware that you are trying to apply for a loan. They can recommend the loan searches and can help you with certain documents such as the tax returns for the business.

• Bad credit 

Bad credit is one of the basic areas where the lenders will look. If your credit is bad, then there is a high chance that your loan application will be rejected. Because you have a profitable business, it may not mean that your credit record is great.

Your credit score could have been damaged due to missteps in the past. It isn’t just about business credit; even your personal credit is taken into account when you are applying for a loan. Some lenders only check personal credit.

Before you make a loan application, check your credit scores – personal and business. Make sure that there is nothing that could cause concerns such as an outstanding bill that you weren’t aware of. Some lenders do work with people who don’t have the best credit scores, but you may want to start with the best possible option.

• Problematic business plan 

It is necessary to have a good business plan in place. It may be problematic if you don’t or have a shoddy business plan. The business plan must clearly state the direction of your business and must show good preparation.

If you don’t have a plan or aren’t sure how to go about it, talk to an accountant or financial advisor to polish your projections and strategy.

Lenders have to be made aware that your business is in capable hands. Give them an understanding of how you will be using the loan funds. Lenders are more interested in activities that provide growth rather than just ensuring cash flows.

• Payment and not enough income 

This is one big warning sign that will make lenders reject the loan application. If your business has debt or credit card payments, you must be able to prove that the income you get can cover those and any new payments if required.

The income you earn minus the ongoing payments gives you the real income you have to make any new loan payments. The business you won mustn’t empty your wallets completely.

This is the debt-service coverage ratio, and you must be aware of it. If the income projections show that you may not be able to pay the new loan amount, then lenders will reject your application.

• Applying to a lender that has denied a loan earlier

 If a lender has rejected your application earlier, the chances are high that they will do so again. It is good practice to not apply to the same bank or institution again, that has turned you down before. Don’t do this unless your financial situation has improved. However, there are plenty of lenders in the market, so if one doesn’t approve your loan, someone else might.

Try to understand why your loan application was rejected. If it is something you could do better, do it. Make better plans and get your books in order. Once you are sure that everything is in order, then make an application again.

A loan application is a process that takes effort. Take time and make that effort to get the best results.