Credit score report, bank statements, business tax return documents, consistent cash flow, and a calculated business plan is one of the many chapters in the long book of a business loan approval. Instead of focusing on one factor – a credit score – a borrower must pay equal attention to the remaining factors that are responsible for the final verdict. According to the data published in the CBC Insight Report more the 60% of the business managers who apply for a business loan get the funds, but the loan amount is lower than what they needed and applied. Another survey done by the Federal Reserve shows that 23% of small business loan applicant gets no funds at all. Over the years many small business owners are leaning towards alternative lenders as the approval rate of the business loan from the alternative lender is 24% higher than a traditional lender.
What are the reasons behind the rejection?
There can be multiple reasons behind a small business loan rejection. The eligibility criteria of a Merchant Cash Advance vary from the eligibility criteria of a business line of credit. The survey, conducted by the Federal Reserve Banks highlights the following reasons behind the business loan rejection:
- 36% of the applications are rejected because of insufficient credit history.
- 35% of the applications are rejected because of insufficient collateral.
- 30% of the applications are rejected because of pending or outstanding debt.
- 27% of the applications are rejected because of the low credit score.
- 22% of the applications are rejected because of the applicant’s incredibility to manage the business.
- The remaining 7% of the applications are rejected due to other factors.
Through this research, we are able to identify the factors causing the problems, let’s shed light on the solutions and some ways to increase the chances of business loan approval.
- Don’t take eyes off your personal and business credit score.
In case you didn’t know this before, small business owners residing in the US can request the credit bureaus to share a credit score report. Get in contact with Equifax, Experian PLC, or TransUnion and read your credit report as if you are reading your favorite book.
Contact your potential lender and ask him whether he needs the personal or business credit score. In addition to the actual credit score, the credit score report has a complete credit history. A business owner can get the first credit score report, but he or she has to pay for the second one. The more information you need, the more they will charge! Many business owners prefer to apply by the alternative lender because they offer bad credit business loan and businesses with a low credit score can easily qualify for these loans.
Another tip is to review your credit score report again and again. No document is immune to errors. Don’t let your small business suffer, and keep an eye for negatives, missed payments, bankruptcy or foreclosures. Lastly, if you can’t interpret all the data on your credit score, you better get in touch with your financial advisor and know what goes on your report.
- Take care of the pending debt.
Don’t think that you won’t get a business loan if you have outstanding debt. Some managers take help from the external funding to clear off the pending debt; it all depends on how you manage.
Now that we have covered the tips about the credit score, the next factors that lenders focus are on the debt to income ratio. You can find this ratio by dividing the monthly debt payments by the monthly income. The lesser the ratio, the better! This shows the lender that the borrower has enough and consistent cash flow to make future payments on time.
In addition to debt to income ratio, watch out for the utilization rate. Don’t max out on your credit cards, invest the cash in profitable projects. If you spend more than the limit and don’t make a payment on time, the utilization rate increases! Only spend when it is necessary!
- Consistent Income and Cash Flow is the key!
Applying for a business loan and getting access to the funds, is only one part of the loan. The major struggle is to make the payments on time. If your business generates annual revenue of $50,000, it is easier to make the payments on time. Failure to make the payment on time not only allows the lender to seize the assets, but it also hurts your credit score.
The best time to apply for a small business loan is when you have an incoming cash flow and consistent income. This is one of the factors that lenders pay attention to, so a decent income can help you land a business loan with a lower interest rate and better repayment terms.
- Choose the appropriate lender for your business.
After assessing the credit report, outstanding debt, and cash flow, it is time to choose the best lender for your business. Contact the lenders that make the cut and ask them for a quote. After comparing the qualification criteria, interest rates, loan amount, availability, and repayment terms make the final decision. Research your potential lender on various platforms and ask for the customers’ reviews before sharing the crucial financial information.
Look for the lender that specializes in the funding option that you want. If you have a ‘good’ credit score, approach lenders that prefer credit score over other factors. Likewise, if you have a poor credit score, then contact lenders who think a strategic business plan holds the same value as a decent credit score.
- Ask friends and family for help!
Although this is the last resort, but asking friends and family for help is not a bad move. If someone in your family or friend’s circle has a strong financial position, ask him or her to co-sign on the business loan contract. What does it mean? It means, that if you fail to make the payment on time, the co-signer is responsible to make the remaining payments. Make sure the co-signer understands the terms and conditions. Usually, this is not an ideal option because mixing personal life and relationships with business is not a wise move.
Study all of these tips and boost your chance of business loan approval. Merchant Advisors has a small business loan for a wide range of business, even a business with a bad credit score is encouraged to apply. Head over to the official website and apply for a business loan that can help you get rid of financial worries. To stay up to date, follow us on Twitter (@Onlinecheck) and Facebook (@Onlinecheck). If you have any question, feel free to call us on our toll-free number at (833) 827-4412, our loyal and keen financial advisor will answer your every question and guide you throughout the way.