It can be an exasperating process trying to obtain a commercial loan or business loan, even though there are more avenues available for alternative financing, venture capital, and security-backed lending.
This is particularly true for inexperienced entrepreneurs, who are unfamiliar with the potential pitfalls. Here’s why your commercial loan or business loan application may have been declined, and how you can ensure that this doesn’t occur in the future.
Your Business Plan Lacks Credibility
Whether you want loans for purchasing a commercial property, refinancing, mergers & acquisitions, renewable energy projects or WTE financing, your application will not be approved unless you have a good business plan or executive summary.
To ensure that you get the loan you need, always put together a comprehensive and up-to-date plan that shows you have carried out research, being an expert in your niche market and knowing your target customers. Also, you should clearly outline your objectives and provide an accurate estimate of your likely profit and sales.
Lenders must be given a clear understanding regarding your loan purpose and it must be substantiated. Rather than providing spurious reasons for requesting a loan, your loan request must be specific and clear to the lender. Are you purchasing real estate, refinancing to reduce your interest rate, refinancing to include funds for renovations, line of credit to obtain vital equipment, funding a new product line, fund a purchase order, accounts payable, purchase time-saving software, cover seasonal variance in sales prices, or fund marketing campaigns.
Not Understanding Your Credit Rating
Applications for commercial loans, bridge loans, business loans, residential hard money loans, and commercial hard money loans are often rejected because business owners do not know their credit rating. If your credit status is poor, you are unlikely to be granted a loan because you will be regarded as unreliable.
Firms such as Dun and Bradstreet, Experian, Equifax, and FICO can be used to monitor your credit rating. Then, you can develop or fix your credit by lowering your debts, making payments on time, maintaining your existing accounts, not overextending your credit lines, and disputing delinquent or negative comments. You can also use a credit repair company to assist you.
In addition, lenders want to check that you can repay your loan every month, as well as pay your staff’s salaries, rent, and other overheads. If in any given month, you are making less than you are spending, you should first eliminate unnecessary costs, and start invoicing promptly, and search for additional add on revenue services that complement your product or service. You may also consider setting up a fund for emergencies and introducing late fees for late payments. Regarding property loans lenders seek to have a good loan to value ratio depending on the property type, location, and condition. If you are refinancing your commercial property then you want to make sure you have raised your rental rates to market, property is in good condition with no deferred maintenance, and overall expenses and management expenses reduced to raise your Net Operating Income.
Your Business is Not Well Established
Television shows like ‘Shark Tank’ give people the impression that they can approach investors with an idea and receive the funding they require. Even though this is true only a small percentage of these new and revolutionary ideas are actually funded. In reality, though, lenders will look for positive revenues, a proven record, and some market experience. Of course, it is still possible to get funding for a new startup even just based on your credit score without any other supporting documents.
Not Enough Assets
Most lenders will not lend on commercial property or to entrepreneurs without some type of capital into the project, recourse, collateral, or equity guarantee. That is to say, physical property or actual cash infusion is necessary to minimize risk and fund your transaction. This is to ensure if there is any default the lender can still recuperate the funded capital.
Produce a list of all the things you can use as collateral. Both personal and business assets can be included if your business doesn’t possess the equipment or real estate to provide as collateral. Real Estate, Art collections, Investment Accounts, Vehicles, etc can be used for this purpose.
High Debt Levels
Lenders will be reluctant to offer you any extra credit if you or your company is currently struggling with your current debt from other credit lines or loans. Ensure that you repay loans and keep small outstanding balances on the credit lines you have. Each loan is to be evaluated independently but for lines of credit it is important to have them under 30% of the total credit availability which boosts your credit score.
Speak to your lenders, if you can’t repay your debts early enough. The majority of credit card firms, for instance, will offer you a reduced rate of interest so that you can repay your balance quicker with no additional interest included. Some may even offer a 0% introductory rate for new balance transfers from other lines of credits.
In some circumstances, external factors affect lenders’ decisions. For instance, if you wish to grow your furniture delivery company, but the price of fuel or furniture is going up, lenders might regard the loan as high risk because the rising prices might hinder your ability to make a profit and the margins are to narrow.
Always do your due diligence and keep up with trends in the industry. If you realize that there might be external forces that will thwart your efforts, consider applying for your loan in the future, or search for a different loan. There is always a solution.
Contact us today. We don’t provide denials only approvals. Call us today to have a free consultation. No dreams deferred.