Top 2 Reasons For Business Loan Denials

For the previous five years, there has been an increase in commercial financing sources in the US. Specifically, there has been a proliferation in the alternative lending market that fills the need of business owners that do not have the credit (personal or business) or operating capacity to gain approval for traditional bank financing. Although helpful for the short-term, many of these alternative lending sources “trap” business owners into loan structures with high payoffs and abnormally high interest rates. These two factors often cause the firm more harm than anticipated by restricting and sometimes significantly decreasing free cash flow. Traditional bank financing is still the best option for business owners due to the low-cost of the money and the flexibility for mitigating issues with repayment and payoff. In this article, we will focus on the Top 2 Reasons for Business Loan Denials in order to equip business owners with the information to produce and present business loan proposals that are concise, relevant, and factual.

(1) Unresolved Personal and Business Credit Profile (High Credit Risk)

Most business owners and individuals do not have a solid understanding of their credit profiles. Although banks have become more proprietary in their credit risk rating systems, the foundation still remains the credit report for both consumers and businesses. It’s not only enough to know your credit profile, but you must also have valid explanations for any issues reported. Ideally, you want to resolve as much as possible these issues before submitting your business loan proposal.

Your personal and business credit profile also presents a pattern of repayment for the lender and represents a key component of approving the business loan. If the credit reports show a pattern of non repayment or not paying as agreed mostly, then the chances of a business loan denial are fairly high. One way to improve your repayment pattern is to either close unused or unnecessary credit lines or decrease existing credit amounts like credit cards or open lines of credit where applicable.

(2) No Business Plan Equals No Proof (High Management Risk)

Lenders like to see that business owners are organized and focused in their business, and a great way to disclose this is to present a solid business plan. This plan should highlight in the Executive Summary your business goals especially those that include the proposed loan. Many times loan proposals consist of a phone call or brief conversation with the lender with nothing in writing. Always provide the lender with a brief write-up either disclosing the loan opportunity or a business plan that includes an explanation of how the loan proceeds are utilized and repaid.

Also, describe the opportunity to obtain financing as a means to an end. In the past, I’ve experienced how entrepreneurs only offered plans disclosing how and why the financing was needed without going into much disclosure of anything else. In order to improve your chances of receiving approval, give the banker a full picture of the financing’s impact for both the short and long-term.

jerichobizfinance.com is an online platform that specializes in providing expert level advice and guidance to the micro entrepreneur in the areas of accounting / finance, operations, management, sales and marketing, human resources, and lending in order to help grow your business and maximize your cash flow.

 

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