Why Was My Business Loan Application Denied? - Nav

Why Was My Business Loan Application Denied? - Nav

Why Was My Business Loan Application Denied? - Nav

Posted: 10 Sep 2020 02:28 PM PDT

This is a pretty simple question with a more complicated answer. There are a lot of reasons why a business loan application might be denied, but what most small business owners should be asking themselves is, "What can I do to improve the odds of a successful loan application."

Lenders are basically trying to answer three questions:

  1. Can this borrower repay a loan? Does this business have the financial means to make each and every periodic payment? Without adequate revenue and cash flow it's difficult for a lender to approve your loan.
  2. Will this borrower repay a loan? This is a different question and why your past credit history is so important. The lender is trying to judge what you will do in the future based upon what you've done in the past. They want to see a track record of successfully making periodic payments because it is an indication that you will do the same with a new loan.
  3. What if something unexpected happens? Lenders don't want to see you default and they generally don't even want your collateral, but they do want to know that in the event you do have problems, there is a way to mitigate their loss. That's why some lenders require collateral, some require a lien on business assets, and most of them require a personal guarantee.

How successfully you can answer these questions will not only determine whether or not a successful loan application is in your future, it will also determine the type of loan you may qualify for, the lender that will accept your loan application, and the interest rate (or cost) of the loan you'll be required to pay. In other words, there is no one-size-fits-all small business loan and depending on how qualified the borrower may be, he or she might have more options to choose from than a less-qualified borrower.

Because this is a common question whenever I have the opportunity to speak with small business owners, I thought I would share some of the questions I typically ask them to help determine why their loan application may have been denied.

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What Do You Need the Money For? 

Why are you borrowing? What is your loan purpose? The question can be asked several different ways and the more specific and deliberate you are in your answer will not only instill some confidence in the underwriter evaluating your application, it will also help you choose the type of loan best suited to meet your loan purpose.

For example, are you trying to fill a short-term need or a longer-term need? That answer alone could make a difference in the type of financing you look for. In much the same way most people wouldn't purchase a car with a 30-year auto loan, it might not make sense to apply for a 10-year term loan to purchase quick-turnaround inventory that will be in and out of your business in the course of a couple of months.

Some lenders are better suited to meet some business needs better than others. So if you go to the wrong lender, even if you are a good potential borrower, you are likely to see your application declined.

How Much Do You Want to Borrow?

Many times it's not that small business owners want too much, but rather they ask for too little.

Loan amount is another clue as to where you should look for a loan. Many traditional financial institutions want to lend $500,000 to $1 million rather than $45,000 to $50,000. Because it costs them about the same to underwrite a $1 million loan as it does a $45,000 dollar loan, it's not hard to understand why they pursue the larger loans from their larger customers.

If you are looking for $15,000, for example, and apply at the local bank, your denied application could likely be attributed to the loan amount you're seeking as well as your business and personal credit profile. Fortunately, there are numerous lenders ready and willing to offer you the loan amounts many small businesses are looking for.

Your Personal Credit Score Matters

For most small business owners in the United States, your personal credit score is going to be part of every small business loan decision a lender makes. And, if you have a poor score, it is not only going to make getting a small business loan more difficult (though there are options), it's going to likely make any financing you can get more expensive.

Your personal score will help you determine where you should look. Most banks and credit unions are looking for personal scores in the 700s to approve a small business loan; though they will sometimes go as low as 680. The SBAs minimum threshold is around 650. Lower than that and your SBA loan application will be declined.

Many online lenders will work with a borrower even if they have a personal credit score as low as 600—and some will go even lower, but their interest rates will be higher than the bank or the SBA and their terms will likely be shorter. They will also likely require daily or weekly direct debit periodic payments.

There are even some cash advance providers that will work with a borrower if their personal score is in the low 500s, but the costs of the financing will be much higher for those with a score in that range.

A good personal credit score isn't really a guarantee that you'll get the small business loan you're looking for, but it will provide options that a poor credit score won't. With that in mind, every small business owner should focus time and energy in building a strong personal and business credit profile that will enable them to borrow when they need to and select from the best financing options for their business.

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Your Business Credit Profile Can't Be Ignored

Business credit is very misunderstood by a lot of small business owners. In addition to your personal credit, your business has a credit history too. The business credit bureaus consider things like how your business makes lease payments, pays for supplies, or makes payments on other business debt. Far too many business owners don't understand their business credit profile and how important it is to build a strong business credit history.

Start with becoming familiar with your profile and then look for ways to build your business credit. Payment terms from suppliers and business credit cards are both good ways to build your credit strength.

How Long Have You Been in Business?

Your time in business matters because lenders are looking for a track record that indicates your business will meet its financial obligations. That being said, not all lenders require the same thing.

An idea stage startup is probably the most difficult business to fund a loan. Without a track record or any revenue, it's hard for a business owner to answer the first question, "Can this business repay a loan?"

That doesn't mean a loan is completely out of the question. The SBA, for example, offers some startup financing for small business owners with excellent personal credit who can demonstrate an income of some kind that indicates they can make regular periodic payments, but those options are rare. And business credit cards are another option for a new business, provided the business owner has good to excellent personal credit.

Most banks want to see several years in business before they will approve a loan, but there are alternative lenders online that will work with your business provided you have a year under your belt. There are even a handful that only require six months in business.

In other words, depending on where you apply, your time in business will impact whether or not you get a loan approval with some lenders—even if your business metrics look good.

Your Industry Matters Too

Some lenders prefer to work within certain industries and will automatically reject an application that doesn't represent that industry. Some industries are considered to be higher credit risks than others so when you are looking for a lender, many publish a list of restricted industries on their public website so you can determine whether or not your loan application will be automatically rejected or not.

Although some industries that are considered higher risk by some lenders, like restaurants, auto dealers, and general contractors, are considered good customers by others. Your local Chamber Members or industry groups could be another good source of information about who is lending to businesses in your industry. Nav is also a good source of that information and can help direct you to lenders who are interested in working with businesses just like yours.

What Are Your Annual Revenues and Monthly Cash Flow?

This is how lenders try to answer that first question, "Can you repay a loan?" Lenders look at your revenue and cash not only to determine whether you have the ability to repay a loan, your revenue numbers and your monthly cash flow will help them determine how much you will qualify for (think in terms of 50% to 100% of your annual revenue).

Some lenders won't approve a loan if your revenue is below $1 million annually, but there are others who only require $100,000. Make sure you know what the annual revenue requirement is before you apply for a loan to avoid a rejection based on your revenue.

Is There a Bankruptcy In Your Past?

A bankruptcy doesn't necessarily mean a small business loan is out of the question, but it will make it much harder to gain a loan approval.

Depending on how long ago your bankruptcy was discharged and what your credit behavior has been since then, it is possible to get a business loan if it has been at least a year since it was discharged (there are lenders that only require six months), but don't expect the bank to talk to you for at least two to five years. What's more, if your bankruptcy hasn't been discharged, a business loan is likely out of the question.

Does Your Business  Have Any Legal Judgements?

Most lenders do not look favorably on any legal judgement or the associated liens. Any open liens resulting from a legal judgement will make it harder to get a loan approval, but any judgement over $10,000 is even more serious.

Do You Have Any Collateral?

Not all lenders require specific collateral to secure a loan, but most traditional lenders and the SBA loan guarantee program typically does. The SBA will not always require a borrower to fully collateralize a loan, but they will take all the collateral that you have.

The collateral requirement can make it difficult even for healthy businesses that just don't happen to have any assets that could be used as collateral to secure a loan from a traditional financial institution.

Fortunately, there are lenders that don't require specific collateral and instead rely on a general lien on business assets and a personal guarantee (along with most traditional lenders) to secure a small business loan.

You Don't Need to Be a Financing Expert

You don't need to be a financing expert to secure the right financing for your business, but you do need to be a little more savvy when it comes to where you look and what you ask for. Better yet, that's why companies like Nav exist—to help you find the right financing for your business situation.

Nevertheless, answering the above questions will help point you in the right direction and help you improve the odds of a successful application. Remember, there is no one-size-fits-all solution, so you want to make sure you have a good idea of what you're looking for, how much financing you need, and what your business and personal credit history looks like before you apply.

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This article was originally written on September 10, 2020.

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Small Businesses Continue To Suffer Pandemic Pain. Is Bankruptcy The Answer? - Forbes

Posted: 11 Sep 2020 09:34 AM PDT

The coronavirus pandemic has been brutal to small businesses. Nearly 79% of small businesses have felt a moderate-to-large negative effect from the pandemic, according to an August 2020 U.S. Census Bureau Small Business Pulse Survey.

"I never would have imagined myself in this position," says Nicole Rosen, founder of Mizfit Inc., a company that provides after-school and summer dance classes to schools across South Florida. Rosen's company successfully applied for a Paycheck Protection Program (PPP) loan to help maintain payroll and operations, but without the same level of demand or ability to hold in-person classes, she still had to let several employees go and dip into savings to stay open.

"I'm pivoting and doing whatever I can to survive," Rosen says.

Although the PPP was touted by U.S. Treasury Secretary Steven Mnuchin as a huge success, with government data indicating the forgivable loan program supported more than 51 million jobs, the sustained economic downturn and its resulting effect on small businesses has stretched far beyond anyone's expectations, leaving many businesses wondering what else they can do to survive.

While Republicans have touted reopening the economy as a way to save small businesses, it may not be the panacea that business owners hope for.

In New York, for example, restaurants will be able to host indoor dining at 25% capacity starting on Sept. 30. But many restaurateurs fear that the revenue generated by this reduced capacity won't be enough to save their businesses, nor hire back all of their employees.

In an interview with the New York Times, Eric Ripert, chef at Le Bernardin, said, "I know I can make it work at 50 percent, but the expenses of getting it up and running, versus the revenue, my gut tells me it will not work at 25 percent."

Some business owners have pinned their survival hopes on another round of PPP. But  the Senate failed to pass its latest stimulus bill, and with lawmakers stuck in a months' long stalemate, there may be no relief before the end of 2020.

As the funds from CARES Act programs like the PPP and the Small Business Association's (SBA) Economic Injury Disaster Loan (EIDL) Advance grant are depleted, small business owners are left wondering if they can survive until—or even if—additional government aid arrives.

"The [CARES Act] kind of cushioned the immediate impact but didn't fix anything long term." says Ike Shulman, co-founder of the National Association of Consumer Bankruptcy Attorneys (NACBA). "There are going to be people filing for bankruptcy that never had a clue they'd need a bankruptcy lawyer."

When a business has already exhausted its PPP loan but sales haven't rebounded, what's the next move?

Stuck in Limbo While Lawmakers Stall

Small business owners waiting on negotiations about future aid may consider turning to other avenues, although each comes with its own potential pitfalls.

"Fast cash" options, which are lines of credit issued to a small business and often backed by a personal guarantee, have proliferated over the past few months. And although it may seem appealing to get money quickly to tide you over, these types of loans often come with sky-high interest, says Leslie Tanye, a lawyer and founder of debt solutions law firm Tayne Law Group, P.C. in Melville, New York.

"In today's environment alternative funding is limited, loans are more restricted," Tayne says. "It becomes a Catch-22 for a business owner: What do you do to get money and how do you keep your business up?"

Although there are low-cost small business loan programs available, including the SBA's EIDL program, the Federal Reserve's Main Street Lending Program (MSLP) and Community Development Financial Institutions (CDFI loans), the thought of owing money can be unappealing without a clear path on how to repay it.

"I don't owe anybody any money, I don't want to owe anybody any money," says Joey Ball, who owns several franchises in the greater Los Angeles metropolitan area. "It's going to be a hard decision to think that you're either going to have to borrow money to stay afloat or to just file bankruptcy and wait for this to blow over and start again."

Ball says he received PPP funding, but the money he received for all seven of his businesses—including five massage and skin care salons, one waxing salon and one tanning salon—has now been spent. His businesses are closed, and he anticipates at least two of them will never reopen.

Ball also says many of his employees have moved on to other jobs now that the federal $600 unemployment benefit has ended, making it near-impossible to reopen even if he could.

"The only thing at this point that's going to save me is a second round of PPP," Ball says.  "Basically the government is controlling my destiny."

What to do When You Don't Want to Shut Down

Closing your doors permanently may not be your only option.

"The natural inclination is people don't want to file [for bankruptcy], they'll do whatever they can to stay afloat; but if the mountain of debt that they are facing is so large that they know its a real possibility, then the earlier they the get organized the better," Shulman says.

Another option may be debt negotiation.

"Renegotiating your debts with an experienced financial attorney, especially if you have assets, allows more flexibility than in bankruptcy," Tayne says. "Obviously bankruptcy is an option but it's complicated and expensive. Often small business owners have mixed personal funds with business funds."  And, when someone's personal monies are enmeshed with their business funds, it can make it exceedingly difficult to tell which is which, a requirement for a bankruptcy proceeding.

Tayne recommends taking stock of any business assets you can potentially either sell off or use as a negotiating chip with creditors, along with taking a hard look at your cash flow to see if your business is sustainable in the current economic environment.

Renegotiating debt can also have less of an impact on your business and personal credit. It depends on the type of business you have, but a business bankruptcy can stay on your personal credit report for seven to 10 years, and on your business credit reports for up to 25 years.

If All Signs Point to Bankruptcy, Choose the Right Kind

There are generally two types of business bankruptcy options:

  • Chapter 7. This completely liquidates a business and any proceeds are used to pay off outstanding debts. Your business can no longer operate but you will no longer have debt.
  • Chapter 11. This is a reorganization of a business' debts that allows creditors to work out a payment plan, sometimes at a reduced amount while still operating the business. It requires a debtor to first complete credit counseling and can be an expensive proposition with filing fees alone running into the thousands of dollars. But if you think there's a chance your business eventually could return to profitability, Chapter 11 may be the right choice.

There's a provision of Chapter 11 that may make it more palatable to smaller business owners trying to buy time until the economy bounces back. Within the Small Business Reorganization Act of 2019 (SBRA), there's an option that allows business to spread administrative fees out over three to five years versus the traditional upfront payment of administrative costs.

Before taking action, consult with an attorney to help determine your next steps. Many bankruptcy or financial attorneys offer free consultations before you have to commit to working with them or taking legal action. Most states have legal aid societies or lawyers who will take cases pro bono or at a drastically reduced cost for those who qualify financially.


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