“If only I could get a small business loan for my business.” What a common thought by many of us! Business owners need small business loans and access to working capital to start, build or grow their businesses. Statistics abound on the reasons why businesses don’t succeed.
At the top of those lists of reasons why businesses fail are:
- Poor or lacking leadership.
- Inadequate or non-existent marketing plan(s).
- Not enough access to capital.
I would totally agree with the lenders and accountants of the world who also warn against excessive debt. But let’s remember that the excessive debt conversation is almost always about people who use capital poorly. I’ve yet to read case studies about business owners who properly acquired their small business loan or line of credit, then used the financing wisely and strategically, and then failed due to excessive debt.
So if we believe that financing, when acquired and used wisely, can be a great growth and expansion tool – what are the 3 most common mistakes that entrepreneurs and small business owners make that makes it difficult or impossible for them to get approved for financing? And what happens when these mistakes are made?
We see several hundred requests for financing each and every month. Here are 3 things that will hurt your chances of getting that small business loan approved.
Ways to Get Your Small Business Loan Denied
Lack of Strategy
You don’t know what your borrowing options are. So you apply for a loan(s) without having any knowledge or strategy behind the plan. In other words, there is no plan.
A plan would mean that you know what you can and can’t do, based on the lending solutions that are available to small business owners. When you boil it all down, there are probably 10-12 primary types of debt solutions that do not require you to give up ownership of your business. Do you know what those are and which ones are the best fit for you? Things like credit, industry, seasoning, location, collateral, cash-flow, reserves, your need/purpose, etc. will all be factors that determine your options.
Bottom line: With knowledge there is a path forward for you that either gets you that coveted financing now – or later. Get on that path and pursue your objective with a plan. Investigate startup financing options.
Failure to Treat Your Credit as an Asset
You’re not treating your credit as the asset that it is – or could be. There are a couple of simple facts here. You either have excellent credit that is robust with no blemishes, and low utilization on your credit cards – or you don’t.
If you are part of the 10-20% that have this excellent credit profile, are you protecting and preserving it as you start, build and grow your business? If you’re part of the 80-90% who have one or more issues with your credit (derogatory items, high revolving debt, etc.), what are you doing to intentionally improve your credit profile and FICO scores?
In the world of small business loans, you may not have as many options as you think just because you have great credit. But there are some good options when your credit isn’t so great.
The most common error here for small business owners is the improper use of credit cards. Don’t use personal credit cards for business. Why? One reason is because 30% of your FICO score is determined by your utilization percentage. Using personal cards guarantees you will hurt your credit profile and FICO scores. Ouch. Additionally, not all business cards are created equal. Some business credit cards report every month to your personal credit report. Ouch again. Don’t believe the hype about using personal cards for business because of their protection under the CARD Act.
Rates are higher since the CARD Act and you’ll hurt your credit if you use personal cards for your business. If you think you’re okay because you pay your bill in full each month, then think again. Credit card companies report the balances to the credit bureaus when they cut your statement and not after your due date. So 9 times out of 10, your balances are going to show on your credit report and lower your FICO scores. Paying your bill “on time” or “in full” will not change that.
Failure to Build and Grow Your Revenue
You’re not building and growing your revenue. It’s true that your financing options will increase and get better as your business gets older. However, this is mainly true if you’re growing your company revenue. Remember, Peter Drucker said that business all boils down to innovation and marketing and it’s your marketing plan (did I have the nerve to say “plan”) that will help you grow revenues.
Do this and your success, for both your business and financing needs, are within reach. Plans require research. They mean nothing without execution. So your research should bring you to marketing solutions like inbound marketing, content marketing, direct mail, etc.
These are the three things that are commonly ignored by small business owners as they grow their companies. Be informed. Knowledge is power. Leaders learn and grow and figure things out. So put yourself in the minority by being prepared for the financing you need to get your business to the next level.
Nobody said it was easy. But it’s also not rocket science…thank goodness for that.
Denied Photo via Shutterstock
It would be interesting to talk to a small business loan agent and find out what percentage of applications suffer from these issues. Follow up post?
Tom, this is some great advice for small business owners. I think the biggest takeaway is to do some research and organizing before applying. You should know your business and its plan for growth better than anyone else – well enough to answer any question a financing company might ask you. This advice applies for both banks and alternative financing companies like the one I work for (The Receivables Exchange). It’s also important to find the financing source (bank, credit union, invoice financing, merchant cash advance, angel investment, etc) that is a good fit for your business given its’ age, revenue, and your intended use for the funds– not just the first name that comes to mind.
Not a bad idea Robert. Probably hard to gather since it would be at the lender level. The data may be hard to verify if it came from a loan agent but I’ll definitely give it some thought.
Interesting article, Tom. You’ve given some great reasons for loan denial and even better tips as to how to better our chances. I appreciate you sharing your insights with us in regards to this topic.
Great article! Good to see that there are at least some things that a business owner can do to increase the chances of getting a loan approved.
Thanks Ti. Thanks Thomas…I agree, it’s tough enough so we don’t need to make it any more challenging!
thanks Tom I like the concept of treating credit like an asset. I haven’t heard it said like that before but it makes perfect sense.
Thanks for a good article.
Thanks for the kind words Mike. It’s scary to think how many more small business owners would be getting their financing if they thought about their credit as an asset! The bottom line with credit is preserving it if it’s already excellent and improving it if it’s not where you want it to be. Thanks again Mike!
Tom, you said it very clear, debt is not bad unless used in the wrong way or when the company cannot afford the repayment schedule. When financing your business with debt it is important to use the matching principle where you finance current assets with short-term debt and long-term assets with long-term debt. Some business owners will mistakenly use their working capital line to finance the purchase of land or equipment. They quickly feel a liquidity crunch when there is not enough cash to make payroll payments, pay suppliers or purchase more inventory.
For the working capital needs, consider a credit line. If you are unable to qualify for traditional bank line, look outside the box. There are many alternative-financing companies that offer factoring facility or asset based lines. Look to utilize your assets and find a lender that relies on the value of your accounts receivable, inventory and to a lesser extent on machinery and equipment, as collateral for a line. Alternative lenders will settle for less reliance on a company’s financial performance and more reliance on its asset values.
There are hundreds of factors and asset based lenders in the United States that are ready to provide financing to companies of all sizes and ages.
Thanks for your input. I agree that things like factoring facilities and ABL’s can be great lending solutions. For factoring that’s esp. true for “non-bankable” businesses. Lots of businesses grow too fast or don’t have the credit to qualify for bank financing (as well as other reasons) so the receivables-based and asset-based financing options can be very nice. Keep in mind that in many cases, such as start-ups, the business can not technically afford the repayment schedule (as you put it) so there still has to be a repayment plan but it’s based on factors other than the previous net profit, cash-flows, or revenue since those may not be present. I agree it’s usually not a good idea to use working capital lines of credit for long-term purchases like equipment or real estate. Thanks again Einat!
Brilliant article, Tom. Businesses should have a clear strategy of how they are going to invest the money in to their business rather than just believing they ‘need’ they money and end up not investing it wisely. Strategy is crucial to both securing the loan and making the loan work for your business.
Thanks for the kind words Mel. It’s ironic that everyone talks about the problems obtaining capital but then nobody’s talking about assisting SBO’s with wise ways to utilize the funding they obtain. I suspect that a large % of funding would be invested very differently if people got a “do over” but unfortunately things don’t work that way. Thanks again for your comments Mel.
I don’t normally scroll past the first page or two of the search results but I’m glad I did this time this is great info thanks tom. in one of your responses you mentioned “ABL’s”. What is that? I feel like I know some pitfalls to avoid now thanks. I’ll be back
Hey Jeff. Thanks for checking out the site. ABL’s stands for Asset Based Loans. Hope you come back and continue visiting the site. It’s a great resource and community for entrepreneurs and business owners.
These are all great points Tom, thanks for your insight! It is important for business owners to be aware that there are other sources of funding besides banks, where lending standards generally remain tight. More and more business owners are turning to merchant cash advances, short-term revenue-based loans, and factoring for the capital they need to grow.
These lenders will not automatically reject you because your credit is less than stellar or you are in a “high-risk” industry. Even some business owners who could qualify for a bank loan turn to these sources when they have a growth opportunity they need to jump on quickly – sometimes it just takes too long to get bank approval and funding.
Thanks Christina. You’re completely correct about things like MCA’s, rev-based, and factoring options. It’s great to know that there are the non-bank options out there. Things like factoring are not always as high-cost as some people think. When managed well I’ve seen cases where factoring is less expensive than accepting credit cards.
ohh.., how I remember the days waiting around for my loan denial letter. It wasn’t pretty. I guess back then, not knowing much nor having the internet to rely on for helpful information like this, was a very BIG factor. Let’s just say, I well versed in the proper procedures these days. Thanks for the info though Tom. 🙂
Excellent article ! Thanks Tom for sharing your useful knowledge with us. And the points you mentioned in this article are so useful. You have given very interesting points regarding denial of small business loans. VMS Capital is one of the leading financial advisers provides small business loans. VMS Capital helping people to grow their business with small business loans and also commercial real estate loans. You may contact with them to get your loan approved.
Very informative article. Christina your spot on. Business owners should be looking into alternative financing options besides banks to obtain capital for their business. Some banks are still not willing to lend if they see a risk.
Alternative lenders is definitely something that small business owners needs to consider when looking for financing. Not all alternative lenders will sign off on an application as soon as it comes in though, and for the same reasons mentioned above.
If the owner o business looks like a lot of risk, smells like a lot of risk and sounds like a lot of risk, then it is most likely a lot of risk. Nobody wants to chase delinquent payments.
Too many times we see small business owners, and large business owners, apply for capital only to get themselves out of a short term jam. This only stymies the root cause of the business problems. We often consult with our applicants to find out what got them where they are in the first place and try to help them get out by taking on capital for the right reasons and using it in a smart way.
The banks can see this too which is why small business loans get denied.
Well said, Good info. There is no doubt that for a new business setup, most of the people take business loan but some people’s loan application is rejected by the banks and lots of people don’t know what the reasons behind are. But thanks for the post, it’s really informative for those people which are need business loan.
Good article. I especially appreciated these points – “Don’t believe the hype about using personal cards for business because of their protection under the CARD Act. Rates are higher since the CARD Act and you’ll hurt your credit if you use personal cards for your business.”
I did not know about this and had indeed been using my personal credit cards for business expenses. No more since reading your helpful article. Keep up the good work. I love reading your site. Thank You