Even though taking out a business is a common practice, over 80 percent of loan applications are declined for a variety of reasons. If it’s the PPP, you are seeking but you have been denied, it’s likely your payroll and costs are not well documented, or your business failed to demonstrate solvency through positive cash flow.
In the case of everyday, ongoing operations, outside of a pandemic, many business owners find that they require a loan to jump-start the growth of their company, but with the high decline rate of ordinary business loans through traditional lending channels, how do businesses adapt? Fortunately, there are steps that you can take to prevent your loan application from being declined, but first, let’s examine the primary reasons borrowers are unable to access cash.
Cash Flow
The amount of income that you or your business is bringing in is a major factor for lenders to determine whether or not to approve your loan application. Lenders will want to have a clear picture of how much money you have to operate your business and to repay your loan. Make sure to provide lenders with detailed information about your profit margins, accounts receivable and the rate at which cash moves through your business. Providing lenders with an income growth history is a great way to show them the success of your business and that you’re currently reaching some of your goals.
Credit Score
Lenders may ask you to provide your credit score when deciding on a loan approval, so it’s important to maintain a good credit score. There are several ways that you can positively impact your credit, and increase the chances of receiving a loan. Pay all of your bills on time, because your payment history is a major factor for your credit score. Pay down debt that you may have and make any outstanding payments. Making your phone and utility payments on time will also improve your score. Reducing the balances on your credit card is one of the fastest ways to see improvements.
Debt to Income Ratio
Your debt to income ratio is the percentage of your gross monthly income that is used to pay debts. This ratio is based on being able to reasonably repay what you already owe, or owing more than you can reasonably repay. There are several ways that you can improve your debt to income ratio. Expanding your client or customer base will greatly increase your ability to pay debts quicker. Paying down your debt in larger chunks is excellent for reducing the amount of interest you will have to pay in the long term. Avoid taking on any new debt before applying for a loan, because this can negatively impact your ratio. You can also consolidate your debt to a lower interest rate in order to pay it off quicker.
Collateral
Another way to provide a lender with more incentives to approve your loan is to offer collateral. A few examples of common types of collateral loans are personal real estate, investment accounts, personal vehicles and jewelry. Having a limited amount of collateral to offer will make it more difficult to leverage a loan and lower your ability to negotiate the loan. You will need to identify if you’re willing to take out a loan against your personal property, and whether or not you will be able to afford it.
Time in Business
Some loans require you to be in business for a certain period of time before being able to borrow money. You may have to seek funding through alternative means, especially if you’re running a start-up company with limited experience. Lenders consider newer businesses to present a higher risk towards receiving their money back in time. Alternative financing firms are an excellent resource for newer businesses that have had their traditional loan requests declined. Due to the higher risk for the lender, these loans will often have higher interest rates.
Business Plan
When your business lacks a significant history that you can use to convince lenders of your credibility, developing a comprehensive plan with a clear target audience and sales objective can help you overcome obstacles. Detail the steps that you’re going to take to make each payment on time and reach your revenue targets. Craft this plan with confidence and always be realistic with the numbers that you expect. Lenders will see that you’re putting in significant effort towards ensuring the success of your business, and this can increase your chances of loan approval.
Contact Us Today
If you’re experiencing trouble with securing your targeted loan, talk with one of our brokers about opportunities for your business. During this time of upheaval, lenders and regulators are examining their guidelines to assist businesses in remaining solvent and moving business ahead. We partner with a nationwide network of lenders to provide access to capital when it’s unavailable through traditional means. We work directly with companies to provide guidance, assurance and direct access to reputable sources of funding. Working with a loan broker will help you evaluate your options and take the necessary steps to fund your loan. Visit us online or give us a call to learn more about our services.
