5 Reasons Your Business Loan Wasn’t Approved
Posted by Megan Webb-Morgan on May 29, 2013 in Business Financing, Startups [ 0 Comments ]
When it comes to business lending, banks want to know that a business will be able to pay back the loan, rather than go into default or bankruptcy.
If your business loan wasn’t approved, it could be because of one of the following indicators:
Banks know that 36% of startups fail within two years (Statistic Brain). (Tweet this stat!) In order to ensure that they won’t lose money due to business failure, banks generally refuse to give loans to business that have been around less than two years. Once the business has proven its staying power, banks are more confident in providing a loan.
- Be aware that banks determine the age of your business by your tax returns, not the date that you file paperwork to establish your business.
It takes a long time for your business’s credit to become fully separate from your personal credit. Establishing separate business bank accounts and applying for a DUNS number can help you create that divide; however, no matter how well your business is going, if your personal finances are falling short, it will have a negative effect on your business finances.
- Pay your bills on time, pay down your high credit balances, and avoid taking on more debt than you can handle. It can take anywhere from six months to several years for your credit to improve, so get started before you apply for any business loans.
Poor Business Plan
Your business plan proves to the bank that you have a reason for asking for a loan as well as a solid plan for paying it back. If the bank thinks that plan is realistic and appropriate, they will be more likely to approve the loan. However, a weak, unclear, or missing business plan can sink an otherwise good application.
- Even if you have established and begun operating your business without a written business plan, you still need to submit one with your loan application. There are a variety of free templates on the web that can help you get started. Ask your mentor, your business banker, or other professional to look over the final product before submitting it to the bank.
Just as age of the business, lack of a business plan, and poor personal credit can all indicate to the bank that your business won’t be able to pay back the loan, so too can a lack of business assets, particularly the following metrics:
- Cash to assets.
- EBITDA (earnings before interest, taxes, depreciation, and amortization) to assets.
- Debt service coverage ratio.
- Liabilities to assets.
- Net income to sales.
Addressing problems with any of these metrics can help your business not only qualify for a loan, but also be more successful in the long run.
Sometimes, no matter how good your loan application is, the bank will deny it based on external factors outside of your control. Downturns in the economy make banks tighten lending across the board. Conditions within your specific industry – such as a falling housing market – can also affect your chances for a loan.
- You can’t change the national economy or market conditions, but you can keep paying your bills, running your business in the black, and proving that you’re a good loan candidate.
There are a number of reasons why your business loan wasn’t approved. Go over your application with your personal banker or another professional to identify the weakest areas of your application. Take action to improve your credit, cash flow, and business plan, and try again six months or a year in the future.