Why banks won’t lend to a business
How to go about obtaining finance is a common concern for new businesses and those preparing to expand.
Getting approval for a business loan or line of credit is more difficult than qualifying for a personal loan. It’s crucial that business owners are adequately prepared to meet with a lender to present their business in the best possible light to qualify for the money they need.
Here’s what you can do to streamline the loan approval process for your business.
Your business risk profile
One of the most important parts of any business loan application is demonstrating to a lender that your company is able to make regular payments and repay the loan in full. If your business is profitable, you can show you’re a low risk by presenting cash flow statements, a detailed business plan and, of course, your good credit history. Some of the most common reasons a bank won’t grant a loan to a business are a lack of security (e.g. no business assets), a poor or non-existent credit history, business inexperience and/or a weak business plan.
Know your credit score
It’s highly recommended that you review your credit score before you apply for finance. That way you’ll know whether it might be better to wait until you’re in a better position to qualify. Check that your report is complete or free of any errors that can affect your score. Your credit report includes your payment history for credit cards, equipment leases, mortgage or office rentals, electricity, phone fees and other business expenses. A simple omission from your payment history, such as your internet provider (whom you always pay on time), can result in your credit score being lower than it should be, so be sure to correct any errors immediately.
Before you apply for finance
If you suspect a lender will decide your business is too high risk for a loan, or you’ve been denied finance, apply for a business credit card instead. Your spending limit may be low to begin with, but a credit card will give you that opportunity to build a good credit history. Pay off your balance or, at the very least, make your minimum payment each month. Also keep up with your other financial obligations such as any personal loan payments, rent, leased equipment and any income taxes owing. Wait for six months to a year before applying for a loan and you’ll have a much better chance of approval.
Before you apply, be sure you have all the documentation needed to support your loan application. Include copies of business banking statements, financial reports, a detailed business plan including projections and a well-researched marketing plan.
You should also be prepared to discuss with a lender why you need to borrow the amount you’re asking for, the length of term and how your business can afford to repay it. Make a strong case by demonstrating profitability, a good credit history and a solid business plan, and you’ll be in an excellent position to qualify for the finance you need to grow your business.
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