The most recent Small Business Lending Index from Biz2Credit reports that 82.4% of all small-business loan applications received by big banks are denied. The numbers are considerably higher for small banks, credit unions, and alternative lenders, but they turn away plenty of applicants as well. So why are so many small-business loan applications rejected, and what can you do to help your business qualify for financing?
Creditworthy businesses have the upper hand when it comes to qualifying for financing. Owners of businesses with poor or inadequate credit histories may be able to use their personal credibility to secure business loans. Those lacking business credit and personal credit are bound to have a difficult time landing business loans, especially from traditional lenders.
The solution to this problem is obvious: before the need to apply for a business loan arises, small-business owners should work on building their business credit ratings and grooming their personal credit histories. The earlier the process of building business credit is started, the better, and one never knows when the ability to acquire additional capital will make or break a small business.
Impressive revenues don’t mean much to lenders if excessive operating expenses are causing them to evaporate. After all, borrowers will need to have enough left over to make good on their monthly obligations. Business owners who intend to apply for business loans should evaluate their expenses with a critical eye, cutting costs where it is possible to do so.
Assets and Liabilities
If a business’s liabilities outweigh its assets, lenders are bound to be cautious. It’s not in their best interest to put themselves in situations where they’ll be competing with scores of other creditors for the same business assets, should in the event that the business becomes insolvent. Before seeking business loans, business owners should consider paying down their debts to manageable levels.
Some business loan applicants simply don’t have enough collateral to secure the amount of capital they’re seeking to borrow. Others have the necessary collateral, but neglect to offer it, or are unaware of the types of assets that can be used to secure a business loan. Still others overestimate the value of the collateral they are prepared to offer, failing to take depreciation into account. Before applying for a loan, small-business owners must research the types of assets that can be collateralized, and figure out the current values of their holdings.