Financing a business is difficult. Many entrepreneurs reach a point where they can’t take on any more work or revenue without expanding their team or production capacity. However, they need more revenue to finance team expansion.
Business loans can help finance expansion efforts as long as you’re eligible to receive one. Here are some of the factors that could prevent you from securing a loan to finance your business.
Poor Credit
Your credit score is a summary of your financial history and health. It’s one of the first factors lenders consider when determining your eligibility for a loan. There’s a common misconception that having a legal entity will create separation between your personal financial history and that of your business. However, many lenders look at an entrepreneur’s personal credit score first.
If you have a poor financial background, consider how you can work to improve your credit score. Pay down existing debts, flag negative items for removal with credit bureaus, and ensure you’re making your minimum payments on time. While there are several options for securing a loan with bad credit, you can expect most business-oriented lenders to start with this.
Inability To Pay
It’s also important to evaluate whether you can actually pay a loan back, even without the forecasted revenue that it will help generate. Consider that loans also have interest and fees to consider. A lender may not approve the loan if they’re concerned about your ability to repay.
Before you reach out to lenders, run some calculations to determine what you can reasonably pay back and what those monthly payments will look like. Explore different loan options based on your credit score and compare the options. For example, you might use a title loan calculator to get a better idea of how different interest rates and loan terms will affect your payback plan.
Keep in mind that lenders aren’t just looking at the market as it stands now; they’ll consider potential fluctuations in the future.
Lack of Planning and Organization
Lenders can and will reject your loan request based on poor planning and organization. If you fail to submit all of the required documents or seem disorganized and unclear during your conversations, they’ll feel hesitant to approve a loan.
Start by putting together a well-organized business plan with financials to summarize your business concept and operational status. Then, highlight how the money will be used to generate more revenue. Be specific and realistic with backup paperwork to show the math.
Instead of saying you need $50,000 to expand your business, show how that money will be allocated. It could be $15,000 in production floor upgrades, $25,000 in sales team expansion, and $10,000 in marketing collateral. These details show that thought and foresight were put into the amount being requested.
Take the time to scour through the submission checklist and required fields for your loan application. If you miss something, your application may end up rejected regardless of your business’s viability.
Lack of Knowledge or Research
Lenders want to see that you’ve explored several options before applying for a loan. There are many free government and non-profit resources entrepreneurs can use to help build a business. Working with mentors, discussing options with a financial advisor, and networking through your Chamber of Commerce can all help showcase the time and effort you’ve put into expanding your business.
At the very least, lenders will want to see that you’ve spoken with an accountant or financial advisor. Creating a network can also help you find a trusted lender and have a respected mentor vouch for you. Deciding to pursue a personal or business loan to finance your business shouldn’t be taken lightly. Dedicate time to researching and exploring your options so you can prepare and present your business favorably to lenders.
