Being a small-business owner requires you to wear all kinds of hats, especially in the early days, when you put hat in hand to request a bank loan.
Unfortunately, getting a loan isn’t as easy as in decades past, particularly since the Great Recession, and many business owners find themselves turned down for loans that would help their companies stabilize and grow.
Here are a few reasons businesses may not get approved for loans and ways to prepare yourself before applying.
Low credit score or bad credit history
Most people know their credit must be acceptably high before they apply for a personal loan, such as a mortgage. A FICO score of at least 620 is usually necessary for a conventional home loan, according to Investopedia, and the lowest interest rates are generally given to customers with scores of at least 760 .
Similarly, banks look at the credit history and score of a business owner to decide whether to grant a loan. It’s good practice to prepare by reviewing your credit report and doing what you can to improve the score.
Businesses should also show they have good credit, independent of the owner. Plan ahead by looking for ways to increase your capital, regardless of whether you need the money right away, according to Liberty Capital Group.
Little or no collateral
Too often, a business or its owner has offered nothing as security for the loan, in the form of assets. Either the business doesn’t have enough assets or the owner doesn’t want to offer up personal assets.
But putting some personal assets in the mix, such as cars or a home, strengthens your application and makes it more likely you will be approved, Liberty Capital Group says.
Weak cash flow
Just as every household needs to have a budget where more cash is coming in than going out, businesses have to show that cash flow will be consistently positive.
It can be tough for new companies to have a reliable positive cashflow because of the need to, for example, pay third-party suppliers upfront, Entrepreneur notes, but it’s vital to do everything in your power to budget so you are profitable.
Making and sticking to a budget will show how much money is flowing in and out of your business, giving you an idea of how your loan application will fare.
“If you notice that there is a weak cash flow, you need to cut expenses and find ways to bring in some extra so banks won’t reject your application," according to Entrepreneur.
The type of business you’re operating could make it less appealing to a bank. In general, these businesses have a higher likelihood of not succeeding, and then defaulting on a loan.
“One of the examples is restaurants, as the failure rate of restaurants is high,” according to Liberty Capital Group. “Other examples include industries on a big scale such as construction, oil and gas, rental or sale.”
If you own a business that is considered high-risk, look for a lender that specializes in your industry.
Lack of preparation
Often, small businesses aren’t approved for loans because they aren’t prepared or don’t follow the process. Collect all necessary documents before applying, according to Liberty Capital Group, and craft a strong business plan.
This plan should include an introduction about yourself and your business and spell out your goals and the strategies you will use to achieve them. Explain how you plan to use the borrowed funds, and analyze how much money you will need, so you ask for the correct amount.
When you’re ready to apply for a loan, turn to Liberty Capital Group, a leading provider of small business loans and equipment financing for over a decade.