Having sufficient funding on hand when launching a startup is crucial for buying equipment and inventory, hiring new staff, renting operational space, or covering various other business expenses.
One way to do it is by getting financing through business loans for additional capital. However, it may be difficult for new companies to secure a business loan due to different reasons like limited cash flow, poor credit history, and so on.
Still, it remains possible to get a successful business loan approval when you know the various factors to avoid. This lets your business be eligible for a fast approval loan as long as you meet the criteria required.
Read on below for the four common reasons why your business loan approval may be rejected.
Incomplete applications
Unfortunately, one of the most common reasons small business loan requests are rejected is due to an incomplete application or missing backup material. Usually, you will need to submit a couple of required documents that will let moneylenders be convinced of approving your loan.
A corporate strategy, three to five years of business and personal tax returns, business direct deposit accounts, financial statement/projections for the business, and personal and business credit reports are among the supporting records most lenders will request. They would also like to see contracts, agreements, licenses, approvals, and corporate records that are relevant to your company. In other words, just ensure you have your paperwork done before applying.
Poor cash flow information
When determining whether or not to accept a small business loan, one of the first items lenders consider is cash flow. They want to know that you have enough cash reserves to finance not just your business costs, but also to pay back the loan and leave some cash in the account.
If the cash balance is inconsistent or you have seasonal slumps on a daily basis, lenders are more unlikely to approve the loan. Hence, to determine the amount of loan payment you can repay later on, take your net operating income and divide it by your total sum of yearly debt to work out your debt service coverage ratio. If your available cash resources is equal to your monthly loan repayments, you will get a ratio of 1. However, while it is acceptable, moneylenders prefer a ratio of at least 1.35 – which shows you have the financial ability to both pay your own expenses and loan.
Business is still in the early years
If your company is still in the early stages, you may not have enough credit history to apply for a small business loan. Likewise, moneylenders need sufficient information about your business to approve the loan, such as monthly business revenue.
As such, you should always ensure careful management of your cash flow when operating a business to increase the chances of instant loan approval. Likewise, note any crucial information that demonstrates your financial ability – such as recording expenses from a new supplier. This lets moneylenders have a clear idea of your credit card background.
Low credit score
When a lender considers the credit score to be too poor, it brings down the chances of securing a small business loan. Depending on the lender and the case, the golden credit score number can vary.
Even if your company has been in operation for a long time, your personal credit record is taken into account while applying for a small business loan. But at the end of the day, lenders need the credit report information to determine if the applicant is diligent in repaying loans.
Conclusion
With a small business loan, it can help greatly in easing the business setup process. Ensure you avoid these factors that can lower your chances of getting a small business loan. That way, you can kickstart your business smoothly.