Applying for a business loan is trying on the nerves. A lot of aspiring entrepreneurs spend their whole lives waiting for this moment. The only thing between themselves and their dreams is money, and money’s not very easy to get.
Getting a business loan request rejected is disheartening, although common. For many entrepreneurs, this is their first time attempting to do anything of the sort. They aren’t experienced in applying for loans, and they aren’t sure what they’re supposed to know. Preemptively combating common mistakes can increase your chances of seeing success with your very first loan application.
Start a Smaller Operation First
Business loans are often rejected due to the applicant’s lack of experience. This creates a catch 22 scenario that’s nearly impossible to escape. How are you going to develop business experience if you can never afford to fund a business, and how are you going to get a loan without the experience they require? Unless you have a wealth of experience in the exact industry you’re attempting to build a business in, you might have to utilize a clever workaround.
Start a smaller scale version of your business that requires low overhead and minimal funding. Run that version of your business instead. See if you can adapt your idea to the internet, or start selling at trade shows. Even the smallest effort that leads to proof that you can successfully sell your product or service is better than approaching a lender without any experience.
Spend Some Time Building Your Credit
Lenders of all sorts favor applicants with good credit. The better your credit, the less of a risk you appear to be on paper. Applying for a business loan with bad credit is something you should avoid at all costs. It’s almost certainly a denial. Applying for a business loan with average to good credit improves your odds but still may not be a lot.
You want to approach your lender with credit so great it will make their jaws drop. People with phenomenal credit rarely get denied loans or credit limit raises because they’re ideal candidates – the lender knows they’ll get their money and interest on time.
Make sure every discrepancy or blemish is erased from your credit history before you apply for a loan. You don’t want any unmanageable outstanding debts to appear when the lender checks your credit. A mortgage in great standing is an excellent debt. Credit cards carrying small amounts of debt with perfect payment history also count as good debt. Try utilizing 20% of all credit made available to you. It shows that you’re responsible with the lines of credit you currently have and that you don’t make a habit of overspending.
Ask for the Right Amount of Money
Asking for a lot of money might seem like a surefire way to get your request rejected. Many entrepreneurs make the mistake of undershooting what they need, believing that it will improve their chances for loan approval. The bank doesn’t see it the same way. Asking for a lot of money is unwise, but only if you don’t actually need that much money.
Asking for too little is just as alarming to lenders. If they feel you’re going to burn through the cash quickly and come back asking for more, they’re going to reject your loan application. They want to create one loan and one loan only. They want payments and interest to be based on that loan. They would rather give you an adequate amount of money the first time.
Review your business plan. Make sure it accounts for every single expense and has a little padding for anything unexpected that may arise. List all sources of funding you currently have and subtract that from the total amount you need. Keep a record of your math. Present all of this information, including your whole business plan, to the lender. They’ll understand why the amount makes sense and see the efforts you undertook to be sure you were requesting the proper amount.
Research Potential Lenders
Sometimes, the entrepreneur does everything right. He or she has tirelessly contemplated every detail of the loan request and presented it perfectly. The only thing they forgot to do was check out the lender. It doesn’t matter how perfect the request is if the lender isn’t the right fit for the entrepreneur.
Some lenders are more risk averse than others. Some lenders specialize in specific industries. Read as much about a potential lender as possible before you decide to turn to them for a loan. There might be a better option than the lender you have your heart set on – perhaps a lender that works exclusively with businesses like yours.
Even the perfect business idea with the best framed loan request may be rejected by a lender. If you tried your best and still were rejected, go back and review your request. Tighten things up a little bit, and submit it to a different lender. Don’t let one rejection keep you from success.
How to qualify for a small business loan?
- Start a Smaller Operation First
- Spend Some Time Building Your Credit
- Ask for the Right Amount of Money
- Research Potential Lenders
About the Author: Alex Lawson is a Financial Team Leader and a blogger, working together with other experts at Brighter Finance. Whenever not working on another project or helping customers with their financial issues, Alex may usually be found online, reading money-related blogs and sharing his tips with other experts.