3 Factors That will Cost You Your Business Loan Application

3 Factors That will Cost You Your Business Loan Application
3 Factors That will Cost You Your Business Loan Application
December 25, 2016

Local business proprietors are usually laden with big dreams for their businesses. Their optimism is usually such that nothing can stand in their way. The only problem that such dreams usually have is that of improper planning. They often desire to relocate without a hitch but disregard or forget vital information which becomes a clog in their business in the long run.

Getting loan approval is a tough task for local small businesses

Proprietors operating small local businesses have a hard time getting their hands on loan facilities. There are many reasons accounting for this and some of them have been highlighted below.

Read also: Merits and Demerits of Purchase Money and Non-purchase Money Loans in Short Sales

1. They are considered as high-risk ventures

The process of lending money is a very risky one since there is no guarantee that the borrower will be of best behavior when it comes to paying back and for that reason, lending institutions are always skeptical when it comes to lending to small businesses because the majority of them fold up in less than three years.

2. They do not have the requisite collateral

Lending institutions will normally ask borrowers to provide collateral which they (the lending institution) will hold on to peradventure the lender fails to pay their debt. These collaterals are usually of same or higher value than the money being borrowed. Many of the small businesses will not be able to meet with such collateral demands.

Read also: A Cash Business Loan might Just be Perfect for a Working Capital

3. They do not have a good credit score

As a borrower continues to borrow and pay back the money they have borrowed over time, their credit score grows. A default in payment will lead to a drop in credit score. Many proprietors have no credit score to back up their request for loans and this usually has a negative implication on their loan application.

Borrowers need to ask their lenders the right questions

When you approach a financial institution for a loan, do not be afraid of asking them what it will take for them to approve your loan request; the particular credit report, excellent business credit rating or that the business must have existed for a certain number of years. Getting these guidelines will help you work to get over them and prevent wasting your precious time.

Read also: What You Never Knew about the Small Business Administration Loans

Borrowers need to understand what personal credit and company credit means

Lenders would likely ask for your personal credit report as well as your company credit report when you approach them for a loan. When the mentioned criteria are not properly understood, there is a high chance that you may cause them to depreciate which will further affect your future chances of securing a loan. If you have been rejected by three banks, there is a strong probability that the rest will do the same. At such moment, you need to revisit your credit rating.

Certain factors need to be put in place when applying for a loan

When you want to apply for a loan, you have to get ready all the documents you think the banks would request to see. These include; a well-written business plan, letter of incorporation, commercial papers with a professional touch and good business rating. You do not only need to have them but also you need to organize them neatly as this will send a message to your financial institution that your business is organized.

View lending institutions from your own eye

Look at yourself as a lending institution. What are those things you would want to see from a borrower? Lending institutions would probably be on the lookout that you meet those conditions too.

Read also: Looking for Ways to Finance Your Company: Try Asset Based Lending

Article highlights

  • Local business proprietors often plan too much without properly evaluating the cost.
  • Loan facility is not easy for such proprietors to access.
  • Lending institutions do everything it takes to minimize risk.
  • Small businesses usually do not have the necessary collateral that will guarantee them a loan.
  • Holding onto collateral reduces the risk of lenders.
  • Credit score depreciates the more you borrow and default in paying back.
  • Borrowers need to ask potential lenders what they need to approve a loan.
  • There is a huge difference between personal credit and company credit.
  • Getting the necessary documents ready can make your loan application faster.
  • Putting yourself in the shoes of a lending institution can help you better understand their requirement.

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