By: The Maine SBDC
Another busy summer is expected, providing both an opportunity and a challenge for small businesses across Maine. The ongoing labor shortage means that many businesses will again need to do more with less.
By: Matthew Gillman
Getting your business loan application denied can be discouraging and frustrating, especially if you’ve been looking forward to that additional cash injection. However, if you’ve been in the business long enough, you know that it happens to many small business owners.
Lenders reject loan applications for several reasons, and knowing what those reasons are can do a lot in improving your chance of approval in the future. We’ve outlined seven possible issues that might lead to business financing denial, along with some quick fixes to each problem.
Poor credit scores or lack of credit history are among the most common reasons businesses get rejected for business financing. Credit scores help banks and other lenders determine your creditworthiness – or how likely you (or your business) are to pay them back. Generally, poor credit scores (below 650) raise a red flag to lenders and may result in outright business loan rejection.
A lot of factors come into the determination of your credit score. For instance, a recent bankruptcy could significantly bring your score down. The same goes for late payments and loan defaults. These will give the lenders the impression that you cannot handle your finances properly, which negatively affects your image as a borrower.
If a poor credit score is the main reason your loan application was rejected, here are a few things you can do to fix it.
Some lenders may also offer financing options to businesses with poor credit scores. The downside is they may charge a higher interest rate to mitigate the risk.
If you’re applying for a loan, it’s also important to consider your business’ cash flow on top of your credit scores. Suppose there are gaps in this area or your company often experiences periods where revenue doesn’t match expenses (and debt repayments). In that case, lenders may reject applications based on that irregularity alone.
Lenders know that many small businesses fail because of poor cash flow management. With that, it’s crucial to monitor your business’ cash inflow and outflow. Make sure that there’s more coming in than out (at least for most of the year). Sometimes, late-paying customers can affect your cash flow, so make sure to adopt a more efficient process of payment collection (e.g., investing in robust accounting software).
Your credit utilization rate simply refers to the percentage of credit you used compared to the credit available to you. With a high credit utilization rate, lenders will assume that there won’t be enough cash to cover the additional financial obligation. On the other hand, too little credit utilization may demonstrate your poor experience in debt management, which also raises a red flag to small business lenders.
Businesses looking to apply for business financing should aim for a credit utilization rate of no more than 30%. That means if you have a credit limit of $100,000, you must keep your credit card balances below $30,000.
If you have a high credit utilization rate, one of the things you can do is pay down some of your existing debts, like credit cards. It’s also important to note that closing credit card accounts can decrease the amount of credit available to you, thus, increasing your credit utilization rate. That said, even if you’ve paid your credit card debt in full, keep the account open as much as possible.
Lenders, especially banks, may require small businesses to pledge collateral to guarantee the loan. It could be commercial real estate, equipment, or other valuable business properties. Unfortunately, most small businesses may not have enough assets on their balance sheets to support the application. As a result, they often get turned down for business loans. Even if you have some assets, if the lender doesn’t view it as valuable enough, it will be harder to qualify for a business loan from banks.
If you’re faced with this situation, consider other forms of financing. For instance, invoice financing lets you use your customers’ outstanding invoices to advance capital. Other lenders may also offer unsecured business lines of credit to small business owners that don’t have enough assets. You can utilize these forms of financing until you have enough collateral to secure a more comprehensive business loan.
Lenders generally require businesses to have at least two years of business history before approving business loan applications. That is because such companies typically haven’t established enough credit or profitability history, making it harder for lenders to gauge their ability to repay the loan.
Startups commonly get rejected for business financing because of their lack of business history. Fortunately, they have more options now than ever. Alternative lenders may offer startup loans to companies that are less than a year old. The only downside is you might have to pay a higher interest rate. Nevertheless, it’s a viable option to consider if your business needs additional financing but you haven’t been in business long enough to qualify for larger loans.
Traditional lenders may consider some industries riskier than others. For instance, service-based businesses like restaurants and construction are considered high-risk because of seasonality and high failure rates. Gambling or CBD businesses may find it challenging to secure financing from traditional banks considering the ever-changing regulations regarding their operations.
That is not to say that such businesses cannot acquire business financing. If your business is high-risk, you can seek funding from lenders specializing in lending to businesses in your industry. Not only will you increase your chances of approval, but you might even get better financing terms.
No matter how stellar your credit history or revenue is, you’ll most likely be rejected for business financing if you don’t submit the required documents. These documents serve as proof of your creditworthiness, convincing lenders that your loan application is worth approving. If you lack the necessary documents, lenders will have no way of confirming your credibility.
The next time you apply, be sure to have a checklist of what the lenders need. Aside from the primary documents like business leases, registrations, identification, bank statements, and tax returns, you’ll also need to prepare additional documents like:
If you’re not sure what documents to prepare, it’s best to give the lenders a call and ask them what they usually require.
Applying for business financing is not for the faint of heart. Rejections can happen, and they can be frustrating. However, by understanding the most common reasons for business financing rejection, you can fix them and improve your chances of approval in the future.
Matthew Gillman is a business financing expert with more than a decade of experience in commercial lending. He is the founder and CEO of SMB Compass, a specialty finance company providing education and financing options for business owners.
Workplace DEI, otherwise known as diversity, equity, and inclusion are top priorities and the path forward for all businesses, both big and small. Having a focus on DEI in your small business will work towards cultivating a more positive culture and provide fair and sustainable opportunities for everyone to grow both individually and together.
Diversity, equity, and inclusion are vital to creating and maintaining a successful workplace. Share on X But to truly implement it into your small business, you need to know what each part means.
Diversity is the presence of differences within a given setting. For example, differences could mean race, gender, sexual orientation, socioeconomic class, age, and more. Equity is the process of ensuring that processes and programs are impartial, fair, and provide equal possible outcomes for every individual. Inclusion is making sure that people feel like they belong in every aspect of the workplace.
DEI is a necessity for all businesses. Small businesses stand to gain from diversity and inclusion (D&I) initiatives just as large companies do. A positive and inclusive workplace will attract diverse talent. This is important for continuing to grow your business. As businesses struggle to attract enough workers to reopen after the pandemic, the competition is even fiercer. Not only does DEI help attract new talent, but it also cultivates the existing talent. DEI has been proven to increase performance, lead to more creative ideas, and make stronger decisions.
When your team is diverse, it can present great opportunities for a small business to use personal professional networks of employees to generate future customers. DEI will create stronger brand or company recognition and lead your small business to thrive.
To start thoroughly incorporating DEI into your small business, take a personal assessment of the current state of your employees. Ask yourself some of these questions, do your employees have equal chances to advance? Do your employees represent different religions or different political views? Do your employees have different backgrounds in education, home life, and economic class?
After you have determined how your business stands, create a DEI plan to implement. Then communicate your DEI expectations, the reason behind the changes, and schedule training. Let employees be their authentic selves and celebrate their differences and similarities. Be realistic with the resources your small business has to set aside for a DEI initiative. Do not expect instant change or improvement in your business, developing DEI in your employees is a process that requires time, dedication, and consistency.
Go beyond the motions of a DEI initiative by continually seeking opportunities to improve your workforce. By creating a solid plan, implementing training, and consistently maintaining high standards, your small business will experience vast benefits in its culture. You will have an increase in worker productivity which will help your business grow and succeed
SHIFT HR Compliance Training, LLC is a training and development company dedicated to improving the company cultures and inclusivity of businesses across the country with our DEI training course, anti-harassment training courses, and more.
This post will be periodically updated
On February 24, 2022, the US and its allies, including NATO members and other independent nations around the globe, imposed sweeping sanctions and technology controls against Russian parties (government institutions, banks, public and private sector companies, and persons) operating inside and outside of the Russian Federation. This is a very fluid situation and monitoring of US government websites is essential in terms of export activities. New US sanctions and controls are expected to be added frequently. Recently, Belarus and occupied territories within Ukraine have also had sanctions imposed. These actions by the US government mean that US businesses must be more vigilant in the export of their goods, services and/or technology in terms of:
Companies must possess a clear understanding of their responsibilities regarding end-use, end-user, and market where the good, service and/or technology is destined, as well as any and all license obligations for that export. Screening prior to shipment is key.
Ongoing information on sanctions and controls are found on the following websites and links:
Businesses of all sizes should use the tools the US Government has made available to stay up-to date as this is a fast moving and often changing environment. The US government provides readily accessible screening tools to help determine if organizations or individuals are on parties of concern/restricted parties or sanctioned entities lists. These tools, along with proper training on utilization, can support a robust screening effort as part of a company’s internal trade compliance program.
These sanctions will have implications for your business operations in other ways. SMEs should be particularly mindful of vulnerabilities and exposures within their supply chain. Recommendations include:
Diversify Supply Chain Inputs: SMEs should review the lower layers of it supply chain. For example, even if a business has a sourcing arrangement with two different suppliers in two different locations, if both suppliers source raw materials from the same Ukrainian sub-supplier, then there could be threats to the continuity of operations as the situation worsens.
Warehousing, Inventory Banks & Safety Stock: The Just-In-Time (JIT) model is efficient but it’s also incredibly tenuous if there are any breaks in the supply chain. Identify key inputs that may be impacted and begin amassing safety stock and inventory where possible.
Lock in Transportation and Shipping Rates (to the Extent Possible): Given the volatile fluctuations in oil pricing, which will have impacts on all forms of transportation, lock in transportation and shipping rates as soon as possible. Companies are partnering with third-party logistics providers in order to defray some of the increasing volatility across labor, warehousing, transportation, and other logistics.
Contract Review: For customer and supplier relationships that could be impacted, it is once again time to get out those contracts to see: (a) whether the contracts contain a force majeure provision; (b) whether the force majeure provisions cover events such as war, embargoes, etc.; and (c) assess whether the force majeure clauses provide termination rights and what the associated notice requirements are. Finally, even if there is no force majeure provision in the applicable contract, the parties may have certain rights to suspend performance under the doctrine of commercial impracticability, depending upon the particular circumstances”.
For questions, contact your local Small Business Development Center (SBDC), US Export Assistance Center (USEAC) across the US, or the BIS help desk. These entities can also help you identify a trusted trade advisor or legal counsel for further information.
Humanitarian relief: Donors should consider making their contribution through a reputable organization with a well-known performance record which will satisfy all compliance requirements directly related to the sanctions.
