There are many reasons why a business loan is rejected. Some deal with the application itself, but others have to do with circumstances surrounding the application. Below are the most common mistakes applicants make that doom their application to rejection:
1. Not knowing your credit rating. Before you apply for a loan, you need to know where you stand. Obtain your credit scores from the three major credit bureaus so you will know the likelihood that your application will be approved.
2. Not reading the terms carefully before signing. In your enthusiasm to get a loan, you skip reading the terms and details contained in the loan documents. Not only should you take the time to read everything very carefully, but you should also ask questions about anything you do not fully understand.
3. Not locking in a rate. Interest rates change. If you think you’ve found a good rate, lock it in before it goes up. Rates go up and rates go down. Nobody can accurately predict the movement of rates so it is better to have peace of mind and know what rate you are getting. This way the business owner can plan for certain costs and expenses.
4. Not explaining what the uses of loan proceeds. When applying for a business loan, you need to explain in detail how the money will be used. Lenders want to see that you know exactly what your needs are and how this loan will meet those needs.
5. Making major changes. Just as you do not want to open and close various credit cards before applying for a personal loan, you do not want to make significant personnel or other changes to your ongoing business structure before applying for a business loan. A change, even a minor one, can throw off the lender’s calculations. Lenders want to be able to see stability in how you do business and with whom.
6. Applying only to the most convenient lender. Although there are various lenders available, many people still head to their local bank first without shopping around. Many lending institutions have a few programs and if the business does not fit into those program criteria, the application will be rejected. It is better to with a broker that can shop around and find the right program that will not only meet the needs of the business but fit into the lender’s criteria.
7. Not having your finances up-to-date. Whether you are seeking a personal or business loan, you shouldn’t apply without having the proper financial documentation. Before applying for a loan, it is important to have your financial information up
to date. Review your financial and take an assessment. Would you lend money to a business with in this financial condition?
8. Failing to have some equity in the project. Not unlike a down payment when buying a home, having some equity in a business project significantly enhances your chances of securing a business loan. If you’re not invested in the project, or in the business itself, the lender will be hesitant in lending money.
9. Having no collateral. You need to provide some collateral, should there be a default in payment. Collateral can be many things such as equipment, bank accounts or accounts receivable.
10. Not having a business plan. If you’re starting a business, you need to demonstrate how the business will operate and make money. A business plan is essential for a lender to see your goals and specifically, how you intend to reach them. You must include all applicable supporting data, including financials. In addition, the lender will want to see the experience of the principals of the business and their history.