Avoiding Business Loan Request Denial
The last thing any business owner wants is for their business loan to be denied. Business loans are essential for starting or maintaining a business; being denied funds can be daunting for even the most seasoned business owners, so you can imagine the burden it places on small and first-time business owners. However, by knowing the basics of what leads to denial, you can better prepare and strengthen your business application’s chances of success.
Length of Time in Business
As a new business owner, you will want to ensure you have sufficient time as a business. Most lenders are known for requiring a minimum of six months to a year (one year plus in some instances) as a functioning business before considering approval for a business loan. Time requirements vary by lender, so it is important to make sure you are researching this before approaching a lender.
It is important to note your financial records will have to meet certain requirements based on the financial institution you are applying with as well. Having met the minimum time requirement does not ensure an automatic approval.
Insufficient or Bad Credit History
Like most other loans, a credit check will be required with most financial institutions when applying for a business loan. Lenders want to know they are distributing funds to responsible borrowers, thus ensuring they will receive payments when they are due and not drastically late. Again, newer business owners might not have a sufficient amount of credit built up yet, resulting in a denial due to the inability of the lender to look at your payment history.
You’re probably wondering how to build credit as a first-time or small business owner, right? Here are some practical steps from the U.S. Small Business Administration that can help:
- Choose the proper business structure – LLC, LLP, or corporation
- Obtain a Federal Tax ID Number – your nine-digit EIN will be used for filing tax returns, applying for permits, and more
- Open a Business Bank Account – you can do this only after you’ve received your EIN; this separates business and personal expenses.
Pre Existing Debt Amount
It is important to make sure you are making payments towards any existing loans. Lenders will look at how many loans you have applied for and your ability to repay the loan. The higher the amount of debt you have, the less likely you are to be considered for a business loan. To keep your business debt at a minimum, you should be keeping track of the lines of credit you currently have. Make sure to do your research before taking on a new line of credit; audit your business to ensure you can cover additional monthly payments.
Risky Industry
Lenders are less likely to approve loans for business in an industry deemed “risky.” Regardless of profitability, you can be denied a business loan if your business falls into the risky category. Several outside factors can lead to your industry being categorized as risky. Overpopulation in the market can lead to your business being considered risky. For example, if hardware stores are on every corner, lenders are less likely to approve a business loan because the market is overwhelmed with that same type of business.
Let Us Help
Applying for a business loan can be scary, and being denied can cause unnecessary stress and frustration. Luckily, your friends here at Bumgardner Morrison are here to help alleviate any stress that comes along with applying for a business loan. Before you start, contact us! Our team of CPAs and financial management experts are ready to get you on the road to an approved business loan. Call us today at 361-575-0271 for more information!
