Capital investment is the keystone to the success of any business. For many small and medium enterprises (SMEs), there is a strong dependence on banks and other financial institutions for business loans. It is easy to apply for a loan in any of the commercial banks in America, as well as other lending institutions. More often than not, the success of the loan application is a losing battle. A small business loan application can be declined for a variety of reasons.
Applying for a business loan
Whether you are applying for a small business loan, business credit line, business credit loan, mortgage, or a business credit card, banks and credit unions are looking for the same thing–how much risk they will take on if they approve your loan. They want to be sure whether you are able to pay the loan and any accrued interest back to them. Financial institutions earn money by charging interest on the loans they lend. But, they lose money when loans aren’t paid back. They want to avoid as many of these bad loans as possible.
Here are the five common reasons why your business loan was declined with a traditional bank.
Bad Credit Score
Your credit is one of the most important factors for any applicant trying to get a business loan. Both personal and business credit scores are thoroughly vetted during the application process, so make sure they are in order before applying. In general, scores can range from around 400 to 850. If you haven’t had a lot of credit experience, it is possible that you won’t have a score. This isn’t a bad thing, but it doesn’t help either. When you request your score (also known as a FICO score), be aware that it is not necessarily the same score that your loan officer will see. Each financial institution can use their own standards for determining your score. Most banks typically won’t loan to a business owner whose personal score is below 680.
There are two types of loans, secured and unsecured loans. Typically, most small business loans require some form of property to back up the loan, such as a house, vehicle or any other assets. The property is called collateral. If you don’t have enough collateral to secure your desired loan size, you may receive a rejection. In case you have a collateral and succeed in getting a business loan, but fail to pay it, the secured property can be taken or repossessed. Also, be aware of price depreciation: just because a piece of collateral was worth $500,000 a few years ago doesn’t mean it’s worth the same amount today.
Time in Business
Young companies have the hardest time to secure business loans because they have an insufficient history. There’s almost nothing to show the lender. If you’ve been in business less than a year, you’re much better off working with an online alternative lender such as 800fund.com.
Cash Flow Problem
All businesses exist to make money, and a bank wants to see that a company is able of doing so before they invest in it. Businesses that have major cash flow problems or irregular patterns may experience difficulty with traditional bank loans.
Finally, it’s important to realize that a declined application could be due to industry specific difficulties, local ordinances or climate conditions. Historically, restaurants and construction-related industries experience particular difficulties with a traditional lender.
Save time with an alternative to bank business loans
If you’re planning to get a business loan, but are not sure you could be approved by one of the five reasons listed above, you should definitely consider taking out alternatives to bank business loans with a merchant cash advance provider. After all, the online banking industry stemmed from the collapse of the economy as a way to help SMB’s get the funding they needed when traditional banks stopped lending money.
If your business has been declined by your bank and you still need working capital, you can learn more about 800fund.com on our website. 800fund.com LLC provides Merchant Cash Advances, Working Capital, Alternative Financing, Business Loan Alternatives, Invoice Factoring, Purchase Order Financing, unsecured business financing, poor credit business loan alternatives. We fund businesses outside the parameters of traditional lenders.