For many entrepreneurs, getting a business loan is often the most effective and easiest way to generate funds for a business, aside from turning to government contract factoring services. However, like many other loans, acquiring a business loan is not that easy. In fact, there are several factors that can keep you from getting a business loan altogether, and it’s not just bad credit.
If you are trying to secure a business loan, take note of the following things that can hinder you from qualifying for one:
1. Poor credit
One of the most common reasons why entrepreneurs fail to get a business loan is bad credit. Your credit history is a major factor that lenders use to assess your credibility and risk level as a borrower. If you have a poor credit score caused by a history of late payments or bad debt, you will likely have a difficult time finding a lender that is willing to loan to you. Either that or you may only qualify for business loans that have exorbitant interest rates–tempting, but not worth the risk, especially if you are just starting your first business.
In general, a credit score above 720 is a good number. The higher your credit score is, the better your chances of securing a business loan with a good interest rate. So, if your credit score is below 720, you should work on bringing that number up before applying for loans. You can do this by correcting any errors on your credit report, downsizing your debt, making payments on time, and generally being more responsible with your finances.
2. Lack of a good business plan
Business plans are rarely perfect, but you should make yours as bulletproof as it can be before applying for any loans. When you start talking to lenders, they will want to see what you plan to do with the money if they give it to you. If you show up with a half-baked business plan–or worse, no business plan at all–your chances of acquiring a loan instantly plummets.
A good business plan contains a well-backed and well-thought-out summary of your business, products, services, market, and financial information and projections. The more detailed you can be, the better, as this shows the lender that you really thought this through. If you are not confident about your business plan, it’s best to seek out advice from a business plan expert who can help you make it convincing enough for lenders to say yes.
3. Excessive loan applications
It can be tempting to send out as many applications as you can to increase your chances of securing a loan, but in reality, this doesn’t make you look good in the eyes of lenders nor credit bureaus. Keep in mind that hard inquiries on your credit history may also lower your credit score temporarily, which can hurt your chances of getting a loan even more.
That said, shop around first before starting an application. Moreover, make sure that your credit score is higher than the lender’s minimum qualification by checking your credit yourself. Unlike when a lender makes a hard inquiry on your credit history, checking your own does not affect your score at all.
Carelessness, disorganization, and lack of due diligence are all red flags for lenders. If you can’t even ensure that your requirements are complete when you show up at your appointment, what does that say about you as a business owner?
With that in mind, double or triple-check the list of requirements that the lender needs, including financial records, your business plan, legal paperwork, and proof of collateral, among others. Moreover, ensure that you put in the right information in all of your documents; triple-check it if you have to. Errors and any lacking requirements can delay your application or cause it to derail altogether as they can make you look disorganized and irresponsible.
These are not the only factors that can keep you from getting a business loan, but they are, by far, the most common for many entrepreneurs. All things considered, it’s best to prepare for your application months in advance to ensure that your requirements are ready, you have done due diligence, and you know exactly which lenders you want to apply to.
If you’re not sure if you’re doing things the right way, it can be extremely helpful to seek expert advice from reputable advisors, such as accountants, business plan experts, financial advisors, and veteran business owners. Furthermore, you can also reach out to your network and gain more valuable insight into this crucial process that can make or break the start of your business.