In order to grow, many B2B organizations require substantial loans. The only problem is that needing a loan and obtaining a loan are two very different things. If you’re struggling to get approved for a loan, you’ll need to do some digging to find out why.
Are These Culprits to Blame?
Obtaining a loan for your business isn’t always as simple or straightforward as those in the finance industry would like you to believe. Just consider the following statistics as curated by Behalf:
- In 2012, 43% of small businesses said they were unable to find sources for their business financing needs.
- In 2013, just 12% of applicants were approved for a small business loan.
- 'Big banks' only approve roughly 20% of the loan requests they receive.
While these stats merely look at business loans from banks, they speak to a larger issue. In the wake of the recent recession, lenders are (rightfully so) more meticulous in their vetting processes. Unfortunately, this leaves a lot of businesses out of luck.
Many businesses are also confused as to why exactly they struggle to get bank loans. While sometimes it’s obvious, it’s often a combination of factors. In order to shine some light on this issue, let’s check out some of the top reasons why lenders turn away applicants.
1. Bad Credit Score
Your credit score might just be a number, but it’s a metric that lenders use to analyze your overall riskiness as a debtor. As Lexington Law explains, 'Lenders may use your consumer credit reports and your consumer credit scores to make assumptions about the overall credit risk your business poses. The lower your consumer credit score, the more risky they may feel it is to lend you money, and the higher interest rates they may imposei, if they are willing to approve your loan request at all.'
While some independent lenders will accept a lower number, Behalf points out that most banks require a 660 FICO score at the very least. For good terms and rates, a 720 is usually preferred. If you’re below these thresholds, then you’re going to have trouble getting a competitive loan offer.
2. Poor Cash Flow
Your credit score speaks to your fiscal responsibility as an individual, but doesn’t necessarily say anything about your business. Banks also want to see that the business is operating in tip-top shape, which means they’re looking for good cash flow numbers.
If your business’ margins are tight and there’s hardly any room in the budget, a bank is going to be wary of lending you money for fear that you have too many expenses already on your plate. You’ll definitely want to clean up the numbers and create more breathing room before applying for a loan.
3. Lack of Collateral
The amount of capital a bank is willing to lend your business will almost always depend on the value of your assets. They want to see some collateral in case things go south and you’re unable to pay off the loan. Collateral comes in many shapes and forms, but is typically classified as inventory, equipment, or real estate. It’s also possible that a business owner could put up his own home and cars as collateral, though this typically isn’t wise.
4. Too Much Existing Debt
How much existing debt do you have? If you have a ton of debt already attached to your business, it’s highly unlikely that a lender is going to let you continue to over-leverage yourself. This is a huge red flag and most lenders won’t even consider your application if your debt to asset ratio is abnormally high.
Shedding debt is obviously easier said than done, but you should always be on the lookout for opportunities to get rid of existing debt. Contrary to popular belief, paying off debts doesn’t ding your credit score as much as you think.
5. Improper Preparation
Honestly, your failure to secure a loan from a lender may simply be the result of a lack of preparation. The loan application process can be lengthy and you need to provide as much concrete information as you can. Leaving sections blank or not providing numbers to back up claims is a sure-fire way to come up empty. Keep this in mind as you go through this process.
Put Yourself in the Lender’s Shoes
When applying for a loan, it’s best to picture your business from the lender’s perspective. If you had no emotional ties to your business and were looking at nothing more than getting a return on your money, would your company be an attractive investment opportunity? Look at all of the factors highlighted above and be honest with yourself. In all likelihood, you’ll find an issue or two that need to be corrected. Take care of these problems and you’ll stand a much greater chance of getting the loan you need.