| Why Your Small Business Loan Was Turned Down and How to Fix It

Posted in Business Financing at 9:00 AM by Loftis Consulting

In the current economic environment it is difficult to get a business loan but not impossible.  The first step after being rejected by a bank for a loan is to dust yourself off and ask the bank for feedback on why your loan application was rejected.  Usually they will be forthcoming for the reasons why they turned it down and you can use that information to improve your chances the second time around.

Many possible reasons exist for why a loan application is turned down but the mains ones are:

  • For a start-up business the business idea was not credible and as a result too risky an investment for the lender because their ultimate goal is to not only get their money back from you but to also earn some interest income.
  • For an established business applying to expand its existing business there are usually concerns that you will not be able to handle the extra strain on your business debts even if you are turning a profit. This means that you did not do a good job of laying out how you were going to afford to pay back the loan if your expansion opportunity did not work out and that your new opportunity is viable.
  • Not enough collateral if things go bad.  Most small businesses will need to provide a personal guarantee for business debts until they are more established.  From the bank’s perspective, if you have bad personal credit then it is likely that you will end up with bad business credit.
  • Lack of personal commitment by you.  One way to show your commitment is by investing your own money into the business.  I cannot count how many hopeful entrepreneurs who only want to provide sweat equity when trying to get others to invest in their idea. Good luck with that one.
  • Lack of a credible business plan and financial projections. Again, how can you approach someone to invest in your business through a loan and you haven’t taken the time to prove to them that your business is credible by having a detailed business plan on what makes your business credible.
  • Not understanding a “good” loan purpose.  The purpose of the loan should be very specific and not general in nature. For example, a loan to cover payroll will not be approved since the additional funds will not help the business earn additional income to pay the loan back.  However, a loan purpose to put in new machinery that will increase profits 20% is something that is concrete but will enable the business owner to grow the business and pay back the loan.
  • Not being able to talk the talk. You as a business owner must be confident in why you are asking for the loan and your ability to pay it back.  A bank will not invest in someone who is unsure of themselves.  Also, you are asking someone for their money, make sure you understand your needs and why and what the expectations the banker will have when doing business with you.

Use these tips and you should be well on your way to getting that first bank loan.  Loftis Consulting can help your business gain access to funds by working with you to build credibility in your financials and business.  If you need assistance beyond our tips, please give Loftis Consulting a call to schedule your free no commitment business review at (312) 772-6105.

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