6 Common Reasons Small Business Loans Are Denied
Factoring your invoices is a quick and easy way to raise cash. It is also an alternative if you apply for small business loans and are denied. Of course, the reasons for denial could play a role in determining your ability to factor invoices, so keep that in mind.
In this post, we will not talk so much about invoice factoring. Instead, we thought it might be helpful to discuss why small business loans are denied. The reasons are many and varied. Here are just six of them:
1. Credit Problems
Just as with personal loans, business loans are subject to credit checks. Banks and credit unions have a fiduciary responsibility to their depositors, a responsibility to make sure they are not lending depositor funds to risky borrowers.
Businesses with credit problems may run into resistance from banks and credit unions. And even when they can secure loans, rates and terms may not be the most attractive.
2. Outstanding Liens
Obtaining a business loan results in the lender placing a lien on the business or its property. Many lenders will not approve business loans if there are other lien holders ahead of them. They want to be in the first position, meaning they are first in line to collect should the borrower default.
3. A Poorly Developed Business Plan
Business plans play a role in whether loans are approved or not. A business plan gives the lender an idea of how company owners intend to reach their goals. Therefore, a poor business plan tends to engender questions of the lender’s reliability.
The business plan issue tends to affect new businesses more than established ones. Obviously, a company that has been around for decades knows a thing or two about business. Lenders are less likely to look at their business plans before rendering a decision.
4. Insufficient Documentation
One of the chief differences between bank loans and invoice factoring is the amount of documentation required. Banks require a ton of it. A company might be the most reliable one in its industry and still not be able to get a business loan if it cannot furnish enough documentation to prove financial soundness. It is a strange quandary to be in, but it happens more frequently than people know.
5. Being in a Risky Industry
Did you know that your company is assigned a business code by credit reporting agencies? It’s true. That code tells anyone looking at your credit report what industry your company is involved in. And unfortunately, some industries are deemed as riskier than others by traditional lenders.
The company trading in a risky industry may have trouble securing financing. Believe it or not, real estate is one of those industries. The fluctuating nature of real estate markets can make it difficult for certain types of companies within the industry to obtain traditional financing.
6. Mixed Funds
Banks want to see clean and clear financials before they will approve loans. That being the case, consider a small business or sole proprietorship that doesn’t have a separate business bank account in the company name. Mixing business and personal funds in a single account owned by the business owner gives banks pause.
All the reasons a small business might be denied loans are reasonable and expected. Banks offer a very specific kind of service governed by rules designed to protect them.
If your company has been denied loans, there are other options. Invoice factoring is something to look at if you only need to raise cash for short-term financing needs. We would be happy to talk with you about it.