The global and national economies have seen major hits in the past few years. We’re still dealing with the fallout from the pandemic, with the potential for new waves of infections looming. More recently, geopolitical events in Ukraine and Russia are playing havoc with the business world, both domestically and internationally. Inflation is flying higher than we’ve seen in recent years, the Fed has hiked interest rates, and the stock market is volatile.
While large corporations are better prepared to weather these economic storms, small businesses can be left feeling bruised and battered.
So here’s the scenario: you’re a small business owner who’s hit some bumps in the road. You need to hire personnel, move to a new property, and update your equipment if you want to keep from swerving into the proverbial ditch. However, your current economic challenges keep you from making the changes you need. Moreover, it’s hard to get the banks and credit unions to give you the time of day. How do you get over this financial hurdle and get back on track?
Most businesses that get turned down for loans get declined for the same handful of reasons. Knowing where others are making mistakes can give you an advantage when it’s time for you to seek financing. First, let’s look at some of the most common problems small business owners face when submitting a loan application.
If you’ve already sought a small business loan and didn’t get the response you were hoping for from the lender, chances are they cited one of the following issues. Even if you didn’t get a clear answer to why you were declined, it’s a safe bet the lender had one of these problems in mind.
Bad Business or Personal Credit
For certain types of loans, a lender will look at your personal credit score and your business score. If it doesn’t meet their minimum requirements, it’s almost always an immediate no-go for a traditional lender. Before you apply, make sure you know the minimum score to qualify. If you’re not quite there yet, hold off on your application and work on raising your score first.
Not Enough Time in Business
It’s typical for lenders to ask for two or three years in business before considering extending your small business any cash. Again, if you don’t meet their minimum requirement, it’s worth your time to seek out a different loan. For startups, it’s a little different. A solid business plan, personal financial investment, and a scalable business model can sometimes convince a lender to give a startup another look IF you have industry experience under your belt already.
Insufficient Cash Flow
Most lenders aren’t in the business of bailing out failing companies. They want to know they’ll receive a return on their investment. That will not happen if the business can’t repay the loan. Having adequate cash flow, and being able to prove it, is key to getting the loan you’re after. You can address this in several different ways. Tighten up on your expenses. That could mean switching to energy-efficient devices that save you money on utilities or getting on top of outstanding receivables.
If you’ve been lax with your bookkeeping or having trouble keeping your paperwork in order, now is not the time to seek a loan. One of the main barriers to borrowing is applying without all the necessary supporting documentation. You may find it helpful to get professional support in this area by consulting with an auditor, accountant, or broker. If the lender has a checklist, use it.
Some businesses get declined simply because they’re in an industry considered “risky” by the lender. What’s risky isn’t always the same from lender to lender or even month to month. During the pandemic, theaters and restaurants would be considered high-risk businesses. If the lender feels – rightly or otherwise – that your type of business is more likely to fail than others, they’ll want to avoid that risk and lend to someone else. But you don’t have to completely alter your business plan to get a loan. Seeking out a lender specializing in your type of business will be worth the time.
In fact, lenders are very risk-averse, meaning they’re less likely to lend if they see any red flags. Following that line of thinking, let’s take a look at some of the factors lenders see as risks and how you can decrease the risk associated with financing your business.
Decreasing Your Risk Profile
Although lenders have some leverage when deciding their limits, there are a few universals regarding risk. Whether explicitly stated or not, lenders look for these qualities when reviewing your application. Review your application beforehand to see if it exhibits the following positive features.
A Clear Plan
Having a clear, well-written business plan greatly increases your chances of getting a loan. Ambiguity doesn’t play well with lenders. Your plan should be packed with relevant figures and projections based on facts. A few basic ingredients in any good business plan are a description of the company, an executive summary, a description of your products and services, a target audience and marketing plan, a financial plan, an operational plan, and goals. Include what problem you’re solving and why your unique product or service solves it best.
A Scalable Model
This ties in a bit with the goals in your business plan. Do you have a growth plan? Say you get the loan you want. That might get you from point A to point B, but then what? Showing how your business can operate at various levels indicates you’re planning for success. As your returns increase, your costs should decline. Plan to invest in capital, labor, and services as you grow to see exponential gains.
Not even lenders expect you to have everything figured out on your own. You might have great leadership skills but not know how to run a marketing campaign. Your product development prowess could be on point, but when it comes to accounting, you’re at a loss. This is why it’s always a good idea to seek expert advice where and when you can. When you’re getting your business plan and application together, reach out and get professional opinions. Seeking assistance from the experts shows lenders you’re not afraid to tap into other resources.
Number of Applications
When a lender sees you’ve got applications all over town, it’s not a good look. Not only do multiple hard inquiries hurt your credit score, but it also signals to the lender that you might be high risk. It’s a drain on you because you’re not concentrating your efforts. Instead of taking shots in the dark, hoping someone will decide to approve you, do your research. Take the time to identify which lenders have the best deals and which you’re most likely to qualify for. Then, put together a thoughtful and complete application to no more than three or four different lenders. Alternatively, a brokerage such as ours will utilize our relationships and network to “soft pitch” lenders and find the right spot for you.
There should be no bigger cheerleader for your business than you. You started a business because you’re passionate about your ideas. Make sure that passion shines through in your loan application. If you can infect the lender with your enthusiasm, they may decide to take a chance on you over another equally qualified company. There are only so many loans the lender can provide. When you show your personal investment (not just financially) in your business, you can stand out as the better candidate.
At this point, you might be thinking, “That’s all great info, but how do I put all these pieces together?” After all, you have a business to run, right? Here’s where some of that expert advice mentioned earlier comes into play. Aside from the lenders themselves, no one has more experience dealing with commercial loans on a daily basis than a broker. Brokers do much more than show you a list of products.
A trained, experienced broker – such as the specialists on our team – can go through your books, identify opportunities, and help you get everything in line. If your credit could use a boost before your application goes to the lender, your broker can show you which changes will raise your score the fastest. Your broker can spot places your business is leaking cash and help you stop the leaks. If you have loans already in place, a broker can see if refinancing them is in order.
Everything from shopping for a lender, freeing up cash flow, and repairing credit to building a business plan can be made easier when you work with the right broker. Once you’re in position, they’ll help you identify lenders that are most likely to say ‘yes’ to your application, holding your hand the whole way through to funding.