One of the worst things anyone can experience in life is rejection. It isn’t just the feeling of being slapped with a rather stinging ‘no’, it is also the effect it has on your confidence from that moment on. Unfortunately, as a new entrepreneur, you will need to develop a seriously strong immunity to rejection because you are likely going to be on the receiving end. That’s not just us being melodramatic either. You see, of all the small businesses that apply for financing, only fifty percent of them will be successful and, of the ones who are, not all of them will receive the full amount. So, yeah, you need to get used to the fact you have a fifty-fifty chances of being rejected.
Of course, this leaves us with one gaping question that demands to be answered: why do half of all new small businesses get turned down for a small business loan?
Well, in order to answer that question for you, we spoke to a selection of financiers, bank managers, loan experts and small businesses to find out exactly what could see a big, fat red ‘denied’ stamp mark your application.
Your Credit Score Is Low
This has to be one of the most important variables in a bank’s decision-making process because of your credit score, in short, is how your creditworthiness is measured. It is how they deem the level of risk you pose to any investment they make in you. As this is your first venture into business, your business credit score won’t exist so anyone looking to give you a loan will carefully analyze your personal credit rating. That is why you need to do all you can to review and understand your credit score. Once you’ve done this you can then work hard to repair or raise it. That means making timely-payments, paying off your debts, not opening any more lines of credit, and keeping those you do have open happy.
You Don’t Have Enough Collateral
You are a risk. You need to understand that. What’s more, the majority of lender is not going to run the risk of loaning you money without having some sort of safety net in place which, in this case, would be collateral they can claim if you don’t repay the loan as agreed. Banks want to know that reimbursement is guaranteed. That is why a lack of collateral is why so many banks tend to turn down loans. The best way to minimize the chance of this happening is to create a list of everything you own that could be put up as collateral. It could be your home, your car, equipment you own, antiques you’ve inherited, the artwork you own, or anything else that is deemed to be of value.
Your Business Plan Is Weak
No investor is going to consider your need for a loan without seeing a detailed plan that explains exactly how you plan on becoming a success. That is why you want to make sure your business plan is as detailed as possible. If you are starting up a business in the food industry, they will want to know what niche you will be focusing on, how much money you are going to spend on equipment, the fact you will be getting your disposable gloves from My Glove Depot, your staff wages, office overheads and just about every single detail to do with your projected finances. It is not good enough to just say you are starting a business in the catering industry and you need X amount to succeed. That is because a business plan is your way of showing you are serious about this. It is your way of proving you’ve done your market research, shows you understand your target audience, that you’ve put goals in place and understand the financial side of your plans.
Your Cash Flow Is Questionable
If you’re asking for a loan, then the banks are going to want to know you are good for paying it back, and that is why they will scrutinize your cash flow so vigorously. They will want to know that you can pay all your running costs – rent, payroll, supplies, vendors, expenses etc. – and your loan too. If you can’t then they are not going to green light your application. The risk is just too high. As such, you need to prove that you will have more money coming in than you will have going out. If this isn’t the case, you’re going to be looked at unfavorably. The best option available to you on this front is to have a good invoicing strategy in place, institute fines for any late-payment (or discounts for early payments), have an emergency fund in place and make sure your spending is the opposite of frivolous.
Your Reasons For A Loan Are Absurd
The majority of banks are going to assess your needs for a small business loan, which means they are going to want to know exactly why you need it. If it’s because you want to put a three-story fish tank in the center of your office then they probably aren’t going to sign off on the money (unless you are going to sell exotic fish as a business). They probably won’t give you the money if you are going to spend it on mattresses for your employees so they get a good night’s sleep. What they want to see is their money being spent to improve your business operations; the kind that will boost profits. Why? Because they want their loan to be paid back. So make sure your loan needs reflect this. It could be a loan to buy equipment, or office space, advertising or to bring in some seasonal products that you know will boost sales.
There are plenty of reasons why your application could get halted at this stage, but it is your responsibility to make sure you plan and prepare for them. It is your job to not give the bank any reason to turn you down. It can be frustrating, it can be a long process, and it can see you get a lot of no’s. But for every rejection, make sure you learn from it.