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 12:00 AM 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.

Business Loan Builder

Business Loan Builder

Access your full business credit scores & reports, including the FICO SBSS — the score used to pre-screen SBA loans.

Unlock your scores now

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.

Connect Your Data to Find the Right Business Financing Options

Connect Your Data to Find the Right Business Financing Options

Do you need more money? Sign up for Nav to see what options are available for your business.

Get started

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.

Chat with our Credit & Lending Experts

Chat with our Credit & Lending Experts

Get free, unbiased financing recommendations based on your business needs from our team of Credit & Lending Experts.

Schedule a call

This article was originally written on September 10, 2020 and updated on September 24, 2020.

Rate This Article

This article currently has 21 ratings with an average of 4.5 stars.

Brewery Loan Overview: Funding options to grow your craft brewery - Craft Brewing Business

Posted: 30 Sep 2020 07:53 AM PDT

loan-money-001

Owning a craft brewery takes a lot of work. This includes making the customers satisfied with the service, providing a lot of beer options, and offering an overall pleasant time in your place. Even if you mastered all of that, there are always things you can proactively improve, but most of them cost money.

If you're starting your craft brewery and are in dire need of money to expand or improve your business, you can research for an online installment loan. There are many loans out there that can help you finance your operations. However, the question persists. Which of these loans can help your business?

In this article, we're here to provide you different financing options for your craft brewery. Once you take your pick, you have to find the right lender to borrow money from, which is relatively easy, depending on some factors. With no further ado, here are financing options you can try out to expand your craft brewery.

SBA loans

SBA loans or Small Business Administration loans are probably the cheapest financing option for first-time business owners, especially for people with small businesses. This is because most of the loan is funded by the administration. Thus, banks and alternative lenders assume fewer risks.

However, all banks and lenders alike have to follow stringent rules and requirements and the Standard Operating Procedure for the loan, including the limit and repayment.

One of SBA's most popular loan products is the 7(a) loan, commonly used to fund daily operations, purchase new products, and refinance other loans with higher interest. 

Also, there is no loan out there that is less expensive than the 7(a) loan, which is excellent if you want to fund your daily operations and keep the costs down. Not only that, SBA loans are the go-to loan if you want to expand your business least expensively. It is also one of the fastest applications out there, with only at least seven days before getting the approval.

Term loans

If you only need a loan that will finance a one-time purchase, you might want to consider looking for term loans. This is arguably one of the most straightforward loans out there, with only 1-5 years of repayment. You can use this loan for any purchase, and the borrowing limit and interest vary per lender. 

If you have an average revenue and excellent creditworthiness, you can borrow up to $500,000. Also, there are lenders out there that will let you decide when the repayment will occur, whether it is daily, weekly, or monthly. Term loans also have the fastest applications out there, with only three days to get the approval.

LOC

If you aren't sure how much money you want to borrow for your business, you can try out LOC. With LOC financing, lenders will let you borrow money whenever you want and how much you want, although they will limit how much money you can borrow. 

If your credit line is revolving, you can continue borrowing money as long as you have paid your balance. Compared with revolving credit, non-revolving credit lines are pretty much the same, although you will have to apply again for another loan after paying the previous one.

Revenue-based loan

Revenue-based loans can be the lifeline of your brewery if you use them right. This is especially true if you are looking to expand your business sometime soon. With an expanding business, you will need to have funding to purchase products or continue daily operations. 

You can do this with bank loans, but they are too time-intensive, not to mention finicky with the repayment terms and borrowing limit. Also, bank loans are harder to obtain nowadays and will sometimes make you wait months for approval.  That said, revenue-based loans are much better, less hassle, and a better financing option than bank loans.

MCA

If your creditworthiness is on the rocks and you're having a hard time getting approved for business loans, then merchant cash advances might be able to help you with financing. MCA is a financing option that lets you borrow money depending on your business' future sales revenue. 

In most cases, you can get approval as fast as a day, with repayment terms that can last for only months or at most, a year. You can also decide when you want to repay, whether it's daily, weekly, or monthly. You can also talk to your lender about how much you will pay each time.

Takeaway

For an expanding craft brewery, having a financing option that is quick and easy is essential as daily operations can be costly, and purchasing equipment doesn't come cheap. That said, researching financing options is essential if you are looking for money for your business. There are a lot out there, so it's easy to find one. Finding the right lender, however, can be a bit tricky.

Tiffany Wagner often dabbles in business financing and fashion in her articles. Moreover, she is also knowledgeable about topics of real estate and health. In her free time, she is often seen playing board games and browsing her socials.

Comments

Popular posts from this blog

Window for Small Businesses to Apply for PPP Funding Closes Saturday - Bay News 9

List of Easy Approval Net 30 Accounts for 2020 - Nav

This new business index offers a more accurate way to forecast recessions - MIT Sloan News