Don’t try your luck in the loan lottery! Find out why small businesses do (or do not) receive financing and take control of your own destiny.
Sometimes, trying for the ideal business loan can seem like playing a raffle. Maybe your ticket matches a few of the winning numbers, but the chances of everything lining up perfectly are slim to none.
Happily, small business owners in need of financing don’t have to rely on lady luck to quite that extent. Educating yourself about why businesses do or do not receive financing is the first step to taking control of your own destiny.
Here are seven reasons your business might be rejected for a business loan.
- You’re Too Young
Young businesses don’t make the cut for many types of business loans. Lenders like to see that your company has a history of on-time payments and financial success. Startups are still working on proof of concept, so companies with less than a year or two in business are a riskier bet for lenders.
- No Collateral
Some online financing options will accept personal guarantees as collateral for your loan, but many of the more flexible, larger loans with killer terms require good ol’ collateral in the form of your business assets (or personal assets if your business has none). This might be equipment, land, buildings or maybe even inventory.
- Your Personal Credit Score Is Too Low
Personal credit plays a huge role in your ability to qualify for a business loan. If you think of this from a lender’s perspective, your payment history is a good indicator of how responsible your business will be with payments.
- Your Business Credit Score Is Too Low
Some business loans, including the Small Business Administration’s most popular loan program, the 7(a) program, consider both personal and business credit scores to qualify your business for a loan. In the case of the SBA, you must meet a minimum FICO small business credit score of 140 (though most lenders require a score of 160) to pre-qualify for an SBA 7(a) loan.
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- Low Average Daily Business Bank Balance
Banks and lenders want to see that you keep a cash cushion in your business bank account. This is one reason why many lenders ask for your monthly business bank statements—it shows them that you’ll have enough to cover your loan payments even when business activity is low. Frequent negative balances, or a bank balance that regularly drops below $1,000, can be a reason to disqualify your business for a loan.
- You Can’t Cover Your Debts
Lenders want to know that you can cover your current debts. To do this, they may calculate what’s called a debt-service coverage ratio (DSCR).A lender might use, for example, a DSCR of 1.25 to qualify businesses for a loan. A DSCR of 1.25 would mean that, if you have a current debt obligation of $1,000, you’d need $1,250 in free cash to qualify for the loan. A DSCR of less than one indicates that your business has less free cash flow than its current amount of debt.
- Your Annual or Monthly Revenue is Too Low
Lenders often ask for this number or extract it from your profit and loss (P&L) statement. Many lenders have a minimum requirement for annual revenue ($100,000, $200,000, etc.), and if your business doesn’t make the annual revenue cut, you might not make it past the pre-qualification stage of funding.
What To Do if You Don’t Qualify for Financing
If you need a cash infusion now, there are options out there that can cover you while you work on improving the factors needed to secure financing. Be aware: Some of these options carry higher interest rates than their more-ideal counterparts, but they’re useful as a stop-gap measure until you can get approved for the loan you want.
If business age or business credit is your problem but your personal credit is sound, consider business credit cards. Business credit cards allow you to make purchases on credit while building your business credit. Here’s a hack: Get a card with a 0% intro APR or low-rate balance transfer option if you think you’ll need to carry a balance from month to month while you ramp up sales. Just make sure you know when the intro rate ends, as the permanent interest rate may be much higher.
Short-term online loans, invoice financing and equipment financing often have less stringent requirements than longer-term loans or traditional bank loans. For example, if collateral is an issue for you, consider a financing option that only requires a personal guarantee.
Is your business credit score holding you back?