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Getting Approved for a Small Business Loan: 5 Ways to Hurt Your Chances

Meredith Wood

Meredith Wood

Editor-in-Chief at Fundera
Meredith is Editor-in-Chief at Fundera. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.
Meredith Wood

Latest posts by Meredith Wood (see all)

When you’re prepping for a job interview, you want to polish your resume, select an appropriate outfit, and practice speaking clearly. If you don’t come to the process prepared, there’s little chance you’ll get hired.

Successfully getting approved for a small business loan isn’t too different from applying for a job. While online lenders make it simpler to apply for a loan, you’re still going to need to put some work into your application.

Luckily, there are a few common and easily corrected mistakes that small business owners make when applying for a loan. To help you avoid these pitfalls, we’ve put together a list of five things to watch out for in your own application to increase your chances of getting approved for a small business loan:

1. You’ve got bad credit (and are unrealistic about it)

Just because you have a functioning, profitable small business doesn’t guarantee that your credit score is sterling. Missteps in the past could still be damaging. And we’re not just talking business credit here—your personal credit score is a big part of the small business loan application. In fact, with some lenders, it is the only credit score they will check.

Start your search by checking your personal and business credit scores from services like Experian or Equifax. You want to make sure there’s nothing you can immediately attend to, like a bill you didn’t know was outstanding, or even a mistake. While some online lenders can work with those that have struggling credit, you want to make sure you start your application with your best foot forward in order to increase your chances of getting approved for a small business loan.

2. You let your books become sloppy

Going into an application with shoddy records and business documentation is a surefire way to get turned down for a loan. Make sure that your books are clean, organized, easy to understand, and otherwise in order. If possible, have an outside financial adviser or accountant review your documents to make sure they are presentable. Not only is the good for business, but it can certainly increasing your chances of getting a small business loan.

Your accountant or bookkeeper should know your applying for a loan, anyhow. They might have great recommendations on where to start your loan search and you might have to ask them for documents throughout the application, such as your business tax returns.

3. You have ongoing credit payments, and not enough income to support more

If your business has a credit card or other debt, you must have reasonable income coming in to support those debts as well as any new loan payment. Your income, minus ongoing credit repayments, is typically calculated in order to determine your real income. This is to make sure that a new small business loan doesn’t completely empty your wallet. Which is something you should hope for, too! This concept is called debt-service coverage ratio and is a term you should get to know if you plan on searching for financing.

If it looks like you might have trouble keeping enough cash around to pay off the loan, most banks and lenders will almost certainly end up rejecting your application.

4. Your business plan is problematic (or non-existent)

In order to take you seriously, a lender needs to see a high-quality business plan that shows significant preparation and a sense of where your business is headed. If you don’t have a fully fleshed-out plan, work with a financial adviser or accountant to polish your strategy and financial projections. Lenders need to know that the company is in the hands of a capable manager. They’ll also want to understand how you’re going to invest the money they are lending. It is always more attractive for a lender to invest in a growth opportunity than to cover cash flow.

5. You apply to a lender that has rejected you before

If a lender has turned you down before, there’s a good chance they’ll do it again. It’s generally smart to not re-apply to the same bank or alternative lender unless at least a year has passed and your financial situation has significantly changed. Luckily, there are many lenders out there, and if you get rejected from one, another one might very well jump in to take on and support your business.

On a similar note, just because one lender tells you no, don’t be discouraged. There are so many different small business lenders today and they all offer different products that have different eligibility requirements. It is best that you start your hunt researching the various products and lenders so you know where to focus your efforts.

Getting approved for a small business loan is more likely to happen if you are prepared. Know the information that will affect your application and which lenders are best for you!

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.
Meredith Wood

Meredith Wood

Editor-in-Chief at Fundera
Meredith is Editor-in-Chief at Fundera. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.
Meredith Wood

Latest posts by Meredith Wood (see all)

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