Getting funding for a startup, especially loan applications from financial institutions, is not usually straightforward. Many entrepreneurs have had banks close their doors on the, even when they believe they have done everything right with their loan application. So, what could have gone wrong? Why was your startup’s loan application denied, and what can you do to avoid the same fate the next time you apply for credit?
What Lenders What To Know
When you approach a lender for a business loan, there are four main questions at the back of their head:
- Can your startup repay the loan – is the business financially stable?
- Will you repay the loan – this touches mostly on your willingness to repay the loan. Basically, do you have a good credit rating?
- What happens when the unexpected occurs? How can the lender mitigate any losses if the unexpected happens?
Why Loan Application For Your Startup Was Denied
When it comes to credit scores, it is not just about your business’s credit score but your personal credit score, too. As the owner of the company, your past in handling finances also matters.
Depending on your country’s average credit score considered a green light, it is best to ensure your personal credit score gets to that point. The lower your personal credit score is, the harder it will be for financial institutions to extend credit to your business. And even if one or two of these firms decide to give you credit, their repayments terms will not be as friendly. You will end up with a higher interest rate, which makes the loan more expensive.
As for the business’s credit score, ensure you have different bank accounts for the business and your personal finances. That includes any credit cards you use to pay for business expenses. This makes it easier to track business expenses and repayment of credit cards and other business loans. Credit scores for small businesses might vary with those of individuals, but a good credit score track assures lenders that your startup means business.
How long have you been in business? Think of it as how long your business has been in existence. Younger startups always face more difficulties when accessing credit from financial firms.
Lenders, especially those in the banking industry, prefer to extend credit to startups with a track record of at least 3 to 5 years. This, of course, locks out younger startups, like those in the idea or implementation stage. Some lenders give credit to startups in this stage, especially if you have a strong personal credit score.
Alternatively, you can opt for a business credit card, using your personal credit history as proof of being a worthy borrower. The advantage of this is that it will help build your startup’s credit history, which comes in hand when borrowing large sums of money in the future.
Business Cash Flows
When a lender wants to know whether the business can afford to repay the loan, they are mostly asking what the cash flows are like. How much revenue does your business bring on daily, weekly, monthly, and annually? Also, how are the other business expenses?
Lenders usually have different credit types for startups, which sometimes have varying revenue and cash flow qualifications. It is important to check out this section on the application form and ensure your startup meets the lender’s revenue requirements. Failure to his, you will end up with a big NO on your application form.
Apart from the business cash flows and revenue, lenders will also look at how much you are borrowing. Ensure you apply for a startup loan that meets the lender’s limits. These limits vary between lenders and countries.
Some lenders will only extend credit on amounts between $500,000.00 and $1,000,000.00 instead of amounts less than $100,000.00. Again, this will depend on the type of small business loan you are applying for and the lender’s limits.
Purpose Of The Loan
It boils down to why you need the money in the first place. Are you looking to add inventory, improve cash flow, or is it a long-term credit to buy equipment? Also, the clearer your answer is, the better it is for you to choose the right small business loan.
When the lender is trying to mitigate any losses if the unexpected happens, they are mostly looking at what collateral you have. Having any collateral can help get your business better rates or repayment terms.
Get Documentations Right
Go over every document you are filling or attaching to your loan application as many times as possible. Every required detail must be filled, without beating around the bush with your answers.
To ensure you have everything right, have a trusted colleague or loved one go through the documentation again. More sets of eyes are better suited for capturing any errors or missing information.
We would recommend having a checklist with the required documentation and information. Every time you fill out the necessary information or attach the required documents, you check that item off the checklist.
Accessing credit for a startup can be overwhelming, but careful consideration of the above before handing in the application documents might help make your case. It is also advisable for you to have a financial and legal advisor who can go over the loan documents and requirements and guide you accordingly.