Why Business Loans get Rejected

Why business do business loans get rejected? Is it because loan officers are just mean people? Though it may seem like it sometimes loan officers are not mean, they are just critical because they have to be. Try to see the situation through the loan officers perspective. A loan officer wants to be sure that you will be able to pay back the loan. That is why he/she will analyze several factors including marketing plan, qualifications, and experience. If you are rejected for a business loan don’t get discouraged, learn from your experiences and know better for the next time. Below are 5 major reasons why small business loans get rejected.

  1. No business plan– Not having a business plan is one way to show bank lenders that you are not prepared for starting a small business. Loan officers want to see that you spent time researching and planning your business venture.
  2. Lack of experience– You should have some experience in the field in which you wish to start a business in. For example if you want to open a restaurant, get a job as a waiter or better yet a restaurant manager. This will give you valuable experience in the field and will also be more appealing to the bank lender. Having experience starting or managing prior successful businesses can also be appealing to the bank lender. You can also hire experienced employees for your top leadership positions (such as managers).
  3. Lack of investment– If you don’t invest your own money why should the bank choose to invest in you. Banks want to see that you are confident enough in your business idea to invest your own money.
  4. Lack of confidence– Show confidence in your business idea. Demonstrate that you are prepared and experienced. Know your stuff- provide facts to support that your small business will become a success. Use statistics, market trends, ect. (Should be included in your small business plan). Do not show that you are desperate for money.
  5. Lack of financial information– Bankers like to see that you did your math. Include future projections of profits for your business and amount of time it will take you to pay back the banker. Bankers analyze this data when determining if they want to give you a loan.

Go back to Getting a Small Business Loan

Small Business Loan Terms

small business loan terms

Getting an overview of the different small business loan terms will help you better understand your loan agreement. When getting a small business loan you will find that there are different loan terms to evaluate in your loan agreement such as interest rates, late charges, ect. You want to get the best small business loan possible therefore be prepared by learning about the different small business loan terms to expect.

It is important for you to know that terms in your small business loan can be negotiated. If you are not comfortable with the loan process seek advice from professionals such as attorneys, CPA (certified public accountant) or small business consultants. They can help you analyze the terms and conditions in your small business loan.

Business Terms you should know before negotiating a business loan

Below are listed some of the major small business loan terms you will find in your loan agreement. Familiarize yourself with these terms. Decide which small business loan terms are the most important for you and which terms you can be flexible with.

Due Date– Make an educated estimation of when you will be able to pay back the loan. Make sure you give yourself a reasonable amount of time.

Late charges– In the risky and unpredictable world of Entrepreneurship, things don’t always work out the way you planned. When things aren’t going as planned for your small business, the last thing you want is to be hit with all those late fees. Just in case you are not able to pay your payments on time make sure your late fee is reasonable.

Collateral– This is a scary one. In the dreaded event that you are not able to pay back your small business loan, your bank may require you to guarantee them your personal assets such as your house or property as collateral. If you can’t pay them back they have full authority to seize your house or other personal assets. Loans that are backed by collateral are called secured loans. Unsecured loans do not require collateral however they are more difficult to obtain. They are issued to the most credit worthy candidates.

Prepayment– You know that you will be charged a late fee if you do not make your payments on time, but did you know you can also be charged a penalty for paying off your loan too early? The reason behind this is that banks don’t like you paying back your loan too soon because that means less interest money for them. Of course you would want to pay off the loan the earliest possible so find out if they offer you this flexibility without charging you a penalty.

Loan Covenant– A lender may impose certain rules and restrictions on your small business to increase the chances of you being able to pay back the loan; this is called a loan covenant. For example they may prohibit your business from loaning money or may require you to submit monthly financial statements. Violations of these covenants can lead to a default on the loan. Keep in mind that a lender can decide to wave a covenant. Make sure your covenants do not pose any serious threats to your small business growing potential.

Interest Rates– Banks normally charge an interest rate of 6% and 9%. Getting an interest rate as closest to the prime rate is ideal. A prime rate is the interest rate lenders will charge their most high qualified candidates.

Fees– Always read loan documents carefully so you are not surprised by any hidden fees. Lenders may charge a fee for discretionary actions such as getting appraisals for your assets. Lenders may also charge processing fees. Be sure to get an estimate for these fees before accepting the loan. Also examine the attorney fees. Attorney fees are used to cover the costs of collecting on a loan if you fail to make payment. Make sure that these fees are reasonable.

Go back to Getting a Small Business Loan

Getting a small business loan

Getting a Small Business Loan

If you lack the necessary funds for starting your business getting a small business loan is a common method of acquiring the money needed for business expenses. Getting a small business loan can be done by visiting one of your local banks; however not everyone gets accepted for a business loan. Lenders and Investors are aware that the startup stage of a business often poses the most risk. Existing businesses have an advantage over start-ups since lenders and investors view them as more stable. Getting a small business loan will not be easy, however it is not impossible. Being prepared and knowing what to expect will better your chances of getting a small business loan.

Tips you should know

Know how much money you will need– Sounds simple enough doesn’t it? However many entrepreneurs underestimate how much money they really need to start their business. One of the top reasons why small businesses fail is because the owner didn’t have enough funds to support or grow their business. However on the other hand borrowing too much money will take you longer to pay back and can result in higher interest rate fees. Do your research and come up with an accurate estimation of how much you will need before getting a small business loan. Be sure you are financially prepared if an unexpected event should happen. Look at not only your short term expenses but also your long term expenses. Keep in mind your business may not make any profits for the first couple of months (or even years).

Schedule a meeting-If possible call your local bank ahead of time or arrange an appointment to see the loan officer. Many bankers prefer that you call ahead to schedule a meeting prior to coming in.

Learn about the small business loan terms– Knowing about the different loan terms will help prepare you for negotiation and better your chances of achieving favorable loan terms.

Bring your business plan– A business plan is essential when acquiring a small business loan because loan officers want to see that you have planned out your business venture. Your business plan will help the loan officer determine if your likelihood of paying them back is favorable.

Provide Personal Financial Documents– Many times loan officers will want to see your personal financial history. A credit rating report or a tax return should be sufficient.

Demonstrate your expertise– Demonstrate to the loan officer that you know your stuff! Loan officers like to see financial information so have that prepared. Show future profit projections for your business and a debt repayment plan. You must be confident in your business plan and show the lender that you are capable of paying them back.

Don’t sign until you are ready – After the negotiation process is over the loan officer will prepare the documents if you are accepted. You can then take the documents to an adviser such as an attorney or business consultant before signing it.

Facing Rejection– If you are rejected for a business loan don’t let it discourage you. If you really believe in your business idea keep trying. Try getting a small business loan through the SBA. Learn from your experiences and improve. Read Reasons why business loans get rejected.