The last thing a business owner wants to hear is that they’ve been rejected for a small business loan. This news for some businesses can be devastating, and could mean that they’ll not have enough cash-flow to expand. In some cases, it could even mean the end of a company and their business dreams.
The thing is, a lot of small business owners don’t really understand why their loan request was rejected. A survey conducted by Nav showed that approximately a quarter of small business owners that were refused a loan didn’t understand the reason for why that rejection took place.
Actually, lenders are required to provide the reasons for rejecting the applicants application with regards to personal consumer financing. However, with business credit or funding, the lenders are not typically required to give specific reasons why the applicant was rejected for the loan. So basically, for personal consumer finance, the applicant would receive a letter stating the reason for being rejected, but for the applicants of business loans, no such letter is provided. (Note: All lenders are not equal. There are lenders which go beyond and above to assist the applicants with understanding why their application was rejected and ways to improve it so that they can reapply.)
Below are the 4 common reasons a small business funding application was rejected and the things that you can do to improve the odds the next time around.
1. Your Industry Code Is Wrong
If you have never run your business credit report at anytime, you might not exactly even take note your business comes with an assigned code that says lender, vendors and collectors what industry your enterprise comes in. Some lenders consider complete industries too high risk for lending. Examples include weapons merchants, real estate organizations and “adult” content creators. Your NAICS or SIC code may be the reason for your being rejected.
If it happens to you: Your NAICS or SIC code was most likely accumulated by the lender via your business credit statement. If you believe your NAICS/SIC code may be wrong, you can dispute the info with the commercial credit agency. However, when you can dispute mistakes on your consumer credit information for free, you will need to buy your full report from the business credit organization to be able to dispute the items in question.
2. You Don’t Have a Business Credit Credit score
You will find more than 44 different sorts of business financing away there-some require a business credit score while some rely on personal credit, revenue, time in business, or a combo of these and other factors. Companies who know and understand their business credit scores are 41% much more likely to be approved.
If it happens to you: If you’ve never checked your business credit profile, you can purchase a credit report from the three major commercial credit agencies-Experian, Dun & Bradstreet, or Equifax. Business credit organizations are not necessary to give free gross annual accounts like consumer bureaus. When you have no credit profile, it’s because distributors or lenders have not reported all of your repayment or account activity. You could call those companions and cause them to become report to the businesses, or wide open a tradeline or credit credit card with a seller that will report.
3. YOU May Have Too Many UCC Filings
If you get approved for a secured business loan, the lender will most likely data file a lien with your state’s Secretary of State to protect their investment. This doesn’t mean they are really actively coming after the belongings to recover payment, but it offers them the to reclaim the property if you default on the loan.
In layman’s terms-it’s like calling “dibs” on the collateral or assets so other lenders can’t follow them if you default on multiple loans.
If it happens to you: Most high-profile lenders won’t loan to a business unless they will be the only lender with a UCC filing onto it or they’re in the “first” position. The situation can pop up from time to time whenever a lender on the loan that’s paid completely forgets to eliminate the lien filing. It’s incredibly typical and can impact a business’s credit profile for years. Regrettably, normally it takes time (6 weeks or more) to really have the UCC filing removed.
4. You Do Not Have Another Bank Account for Your Business
It’s such a very simple part of starting a business, but many business owners don’t have another business checking account. A business without a separate bank account struggles to get approved. A recent Nav survey found that 70% of business owners with out a business bank account had been rejected for a loan before two years.
How come this this needed for business lenders? Two factors. First, it can be hard for a lender to guage monthly and annual revenues, cash-flow and obligations from an individual checking account which has business and personal expenditures. Second, it could be the ultimate way to judge just how long a business has been around business, and “time in business” is a typical underwriting factor for business loans.
If this is a reality for you: then it’s a fairly easy solution: simply get one set up. There are plenty of low-cost alternatives out there and a business bank account can make your accounting and taxes easier to control also.