Why The Bank Is Turning Down Your Small Business Loan
If you’ve ever approached your local bank for a small business loan, you know that the process is lengthy and frustrating.
You go through the trouble of collecting all the necessary paperwork and then you wait.
And wait some more.
All for what?
Not to sound pessimistic but chances are, your loan request probably got denied.
But let’s dig a little deeper.
Why exactly did the bank turn you down?
Time in Business
You might need financing to jumpstart your business or get you through that tough first year.
Loans for those situations do exist.
But, you are not going to find them at your local bank.
If you’re looking for a traditional simple interest business loan with a monthly payment you’re going to need to be in business for at least 2 years.
In fact, you may have a hard time qualifying for this type of loan until you’ve been operating for 3 years.
This is because traditional loans require 2 full years of tax returns to show consistent gross and net profits.
Looking for a Small Loan
You need to start thinking of the bank like a business.
They’re in it for the revenues just like you are.
So they’re not going to put energy into sales that aren’t lucrative.
The underwriting process costs the bank the same amount whether the loan amount is $50,000 or $1,000,000.
Most small businesses are looking for loans that are less than $100,000 which makes the process too expensive for the bank as loans that size won’t be very profitable for them.
Your credit score is a measure of your dependability so banks are going to look at both your personal and business credit scores when they are deciding whether or not to give you a loan.
Your credit scores are a record of your ability to repay the debts you’ve acquired so anything less than 680 will disqualify you from getting a small business loan from your bank.
Banks will give better loan rates and terms to business owners who have a personal FICO score of 720.
Weak Cash Flow
A business owner needs to know the cash flow dynamics of their operation.
A business with tight margins will be a negative when applying for a small business loan with the bank.
The bank knows that your priority will be your usual costs.
Think payroll, rent, inventory, etc.
So you need to prove that you’ll be able to generate enough money to cover both your daily expenses and the cost of the loan.
Your bank will often require collateral- something they perceive as valuable that can guarantee your loan if it’s not repaid.
If you’re just starting out, it may be likely that you don’t have any equipment or real estate that could double as collateral yet.
Or, you may not be willing to use your personal assets, like your house, to back your business plans.
If you don’t own any physical property that you can use as collateral, you will have trouble getting a loan through the bank.
Lack of Preparation
The process is more complicated than you think.
You can’t walk into a bank, fill out an application, and be approved on the spot.
It takes a lot of preparation which includes collecting various documents.
Here’s a list of everything you need for the bank’s process:
- Personal Background
- Business Plan
- Personal Credit Report
- Business Credit Report
- Income Tax Returns
- Financial Statements
- Balance Sheets
- Profit and Loss
- Business Tax Returns
- Bank Statements
- Legal Documents
- Business lease
- Articles of incorporation
- Shareholder agreement
- Commercial leases, etc.
It’s a comprehensive list to say the least.
But, don’t expect the bank to give you a loan if you don’t have every single one of those documents in hand and ready to go.
So there you have it, 6 of the most common reasons why the bank may have turned down your small business loan.
I bet you’re ready to hear some good news.
Even if you don’t qualify for a traditional bank loan, there are other options to finance your business.
Alternative lenders are less stringent than the bank and are able to extend loan offers despite a shorter time in business, credit hurdles or a lack of collateral.
Often times, by working with an alternative lender, you’ll be able to secure a loan quickly and without stacks of paperwork.