Three Roadblocks in the Way of Your Small Business Loan Approval
In this article, we look at three things that often stand in the way of getting a small business loan approved. Learn about the reasons for these roadblocks and specific ways to move past them.
Having a loan application denied is never fun, but it's not the end of the line. Here are three common reasons why banks deny loans, and what you can do in response.
Your FICO score or personal credit record as compiled by credit bureaus TransUnion, Equifax and Experian is just one element that banks consider in a loan application. However, it's often given great weight.
Lenders will almost always need to see your personal credit score in your business loan application. If the score doesn't meet their standards, they may put the brakes on.
What You Can Do
Different lenders can have different FICO tolerances, depending on who is underwriting their loans. Although banks usually don't advertise this information, try to get a general idea of your lender's FICO criteria from a loan officer before you even start your application.
You can also improve your personal credit score by catching up on late payments, or getting a new credit card and being diligent about paying it off every month.
If your business is cyclical in nature, has thin profit margins or is just plain unconventional (the case for many online startups), a lender may consider the venture too risky to finance. Loan officers need to be convinced there will be a steady income stream to support loan payments or some collateral to fall back on if the business fails.
What You Can Do
Risk is in the eye of the beholder. Some banks are more tolerant of risk than others. Here again, it pays to do your homework before applying with a lender. Find out if your bank lends to anyone else in your industry or profession. Alternatively, ask others with similar businesses where they got their financing.
Another way to make lenders more comfortable with your application is by providing extra security. This can take the form of a personal guarantee or co-signer. Both of these strategies can carry serious financial liability, so think hard about whether you want to put your or your co-signer's personal assets at risk for the sake of your business.
Loan officers are people too, and some are better at their jobs than others. Your application may get denied through no fault of your own, but rather due to an officer's lack of experience or organization in presenting the loan package to an underwriter.
What You Can Do
If your bank representative can't communicate why your application was denied or if you suspect he or she is missing important information, try appealing to a superior. That person may have more knowledge of your industry or be better able to negotiate terms.
Above all, don't be discouraged by denial. Keep trying, and remember to learn from your experiences. Even a bank that turns you down can be a useful source of information for improving your chances with the next one.