Poor credit history

Credit reports are one of the tools lenders use to determine a borrower’s credibility. If your credit report shows a lack of past diligence in paying back debts, you might be rejected for a loan. Sometimes, very good people, for reasons beyond their control, have credit issues, and unfortunately, that’s a real barrier to entry in the world of small business. You should build a strong personal credit score and drive down any debt prior to applying for a business loan. The better your personal finances are upfront, the more likely you are to be approved for a good loan option. Most loans require some form of down payment, and this is typically varied based upon the borrower’s financial history and the collateral put up for the loan. Based on this, most loans range from zero to 20% down payment for the loan. If your credit is still far from ideal after you take these steps, consider nontraditional financing options – which tend to place less emphasis on credit scores – before giving up on getting a loan.Angel investors, or individuals interesting in backing the business in exchange for a share in the eventual revenue, can be a way to help get your business off the ground.

Limited cash flow

Cash flow – a measure of how much cash you have on hand to pay back a loan – is usually the first thing lenders look at when gauging the health of your business. Insufficient cash flow is a flaw that most lenders can’t afford to overlook. Therefore, it’s the first thing you should consider to determine if you can afford a loan. Really thinking through that cash flow equation is like preventative medicine for your business, You can either wait until your business gets sick, or you can do things to prevent it from getting sick. One of the preventative measures recommended is to calculate your cash flow at least quarterly. If you take that step, you may be able to optimize your cash flow before approaching potential lenders. To figure out how large of a loan payment you can afford, divide your net operating income by your total annual debt to calculate your debt service coverage ratio. You will have a ratio of 1 if your cash flow is equal to your monthly loan payments. Though a ratio of 1 is acceptable, lenders prefer a ratio of 1.35, which demonstrates you have a buffer built into your finances. If you’re not sure of your current financial position or capacity, sit down with a financial planner to help you gain the perspective you need and create an action plan to address any lacking areas

Lack of a solid business plan

Having a plan and sticking to it is much more attractive than spontaneity in the finance world. It also gives you a better chance of getting a business loan. Lenders want to see that you have a well-thought-out plan for your business, Applying for a loan with no business plan or with a half-baked plan will not bode well. It isn’t uncommon for very small businesses not to have a formal business plan – or any plan at all – but you’ll still need to put in the time and work to develop a comprehensive business plan before ever walking into a lender’s office. If you don’t have a documented plan in place, with financial information and projections, your chances of receiving the big loan you want will dwindle. A standard business plan includes a summary of your company, market, products and financials. If you’re not sure your plan is persuasive enough to sway the lender, consider seeking the advice of a business plan expert who can review it and offer feedback. You should also be prepared to explain how you plan to use the money you want to borrow. At the bare minimum, loan applicants should be prepared to explain why they want a loan and how they plan to repay it.

Too many loan applications

Some business owners assume they can cover all their bases by applying for multiple loans at one time. This way, they can pick and choose from a range of potential offers. However, opening too many loan applications at once can be a red flag for credit bureaus.

Disorganization

Before approaching potential lenders, business owners should have their act together. That means having all the paperwork necessary for your loan application on hand. One of the things that can be a problem when applying for a loan is if business owners don’t have the documentation that the bank will require. Obligatory documentation often includes a detailed business plan and proof of collateral; extensive financial records such as income tax returns, personal and business bank statements, loan history, and a balance sheet; and legal paperwork, such as franchise agreements, business licenses and registrations. There are many resources that business owners can refer to when putting together their loan applications. The Small Business Administration, for example, provides a highly detailed loan application checklist for borrowers. Using these resources decreases your likelihood of coming across as disorganized or unprepared. Careless errors will land your application in the rejected pile. Filling out the application incorrectly or omitting information is another common mistake that can lead to your application getting denied. Pointed out that sloppy bookkeeping and inconsistent business practices, such as mixing business and personal bills together or not filing tax returns, can prevent you from getting financing. She advises taking the time to gather all the necessary information, fill out the forms completely, and read over your application before submitting.

Failure to seek expert advice

When you apply for a business loan, lenders want to see that you’ve sought guidance from knowledgeable advisors. Accountants can be an important source of advice for small business owners.

Failure to shop around

Finding a lender can feel so daunting that it might be tempting to sign up with the first one that comes along. But blindly pursuing one loan provider without exploring your other options is a mistake. Take the time to research a variety of traditional and alternative lenders to find the best fit for your business. Other alternatives to traditional lenders are online lending platforms, peer-to-peer lending sites, and your own network of friends and relatives. If you pursue this last option, suggests working up an official, notarized agreement to avoid any misunderstandings or conflicts down the road between all the involved parties. When shopping around, you can also request that each lender help you calculate the annual percentage rate of their loan offer.

Apathy

So much of the application process for a business loan is methodical, directed by the orderly presentation of concrete documentation, that it’s easy to forget there is an innately emotional component to this process as well. Too many business owners simply don’t demonstrate why they, rather than someone else, are a good candidate for a loan. They approach lenders with an apathetic attitude. In addition to making a sound business case for why you should qualify for a loan, you need to exude enthusiasm and faith in your venture to draw in the lender and makes them a believer. To do this, you must tell a story about your business that the lender finds compelling.