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7 Reasons You May Have Been Denied Business Financing

April 18, 2022

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.

 

These are the 7 Reasons You May Have Been Denied Business Financing Share on X

1. Poor Credit History

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.

  • Pay your debt obligations on or before the deadline
  • Work with suppliers or lenders that report to the major credit bureaus
  • Check your credit report regularly and report mistakes to the credit bureau ASAP

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.

2. Poor Cash Flow

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).

3. High (or Too Low) Credit Utilization

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.

4. Lack of Collateral

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.

5. Short Business History

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.

6. Risky Industry

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.

7. Lack of Documents

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:

  • Credit reports
  • Balance sheets
  • Profit and loss statements
  • Cash flow projections
  • Articles of incorporation
  • Business contracts

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.

Bottom Line

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.

About the Author

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.

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What Is DEI and How Can It Benefit Your Small Business?

April 4, 2022

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. 

What Is DEI? 

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. 

 

How Can DEI Help Your Small Business?

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. 

Where Do You Start?

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.

Russia Sanctions and Technology Controls

March 14, 2022

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:

  • Understanding export control classifications and associated restrictions (EAR99 products are now subject to Military End-Use (MEU) restrictions in Russia, for example);
  • Obtaining certifications that collect key screening elements, including the end user, intended end use and ownership; (foreign resellers/distributors should not reexport merchandise to Russia or Ukraine)
  • conducting screening checks on all parties to the transaction (be mindful that buyers may be wholly or partially owned by sanctioned Russian entities, possibly making them blocked parties);
  • understanding new limitations on licensing policy and the use of license exceptions related to Russian transactions and requesting licenses where applicable, prior to export.
  • Any of your foreign customers that export to Russia must ensure that their product contains no more than 25% US-origin controlled content (de minimis rules).

 

 

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.

Checklist on Better Understanding Your Business Credit Reports

March 14, 2022

Author: Sharita M. Humphrey

A company’s capacity to buy something now and pay for it later is referred to as business credit. You may make it easier to borrow money when your firm needs it by obtaining a solid business credit report. It is a document that contains a picture of a company’s financial credit health.

 

It will include.

  • Company’s financial background
  • Payment history on tradelines
  • Current credit inquiry history
  • Any legal filings, such as judgments, collections, and bankruptcies

While each credit bureau’s report will differ slightly in appearance, they will all contain the same information. As you proceed through the process of securing a small business loan, it’s a good idea to buy a credit report and understand it. Any business credit report you buy should include the following items.

  1. Financial History Section

The Financial History Section is composed of commercial banking, insurance, and leasing data. Your payment history with creditors, lenders, and insurance are shown in this section.

It displays information such as:

  • The date the tradeline was opened
  • The terms
  • The original and current balances
  • Any account delinquencies
  • Business loans
  • Insurance policies
  • Lines of credit
  • Equipment leases
  1. Collections Filings Section

Any legal filings, bankruptcies, or collection reports that your company has filed are in this area. Tax liens, judgments, and accounts that have been in collections for 90 days will be included here.

It includes details such as:

  • Open and Close dates of your collection filings
  • Agencies and their contact details
  • The status of your collection
  • Amount disputed
  • Amount collected

Lenders are less likely to give loans to you if you have a lot of court filings on your background.

  1. Tradeline Experiences Section

The Tradeline Experience Section shows the tradeline payment history of your business. Displayed in the tradeline payment history section is your company’s payment history over the last three years. Payments to vendors are frequently included in this section.

In addition, here are some details included in this section:

  • The time your business was first initially reported to the credit bureau
  • Payment terms
  • Recent high credit line
  • Maximum credit line
  • Monthly payment, whether it’s current or past due

It will also tell you how many times you’ve passed due on a tradeline for 30 days or more.

  1. Business Profile Section

The business profile or company information section is the first thing that appears on a small business credit report. The legal name, address, and data about the company’s incorporation are shown in this section.

It also includes other business data such as:

  • Ownership subsidiary information
  • The number of employees
  • Type of business
  • Years in business
  • SIC code (Standard Industrial Classification)
  • NAISC code (North American Industry Classification System)
  1. Business Credit Score Section

A credit score will be included in a company credit report, just as it is in a personal credit report. Each credit reporting bureau has its own credit scoring range. They should all produce an easily understandable number.

A business credit report states some business information such as:

  • Your company’s degree of credit risk
  • The reasons that went into calculating your credit score
  • A prognosis of your company’s future credit risk based on your report

Credit reports and scores for businesses are indicators of a company’s financial soundness. Business owners’ primary goal should be to develop a track record of regular payments on all their financial obligations. It is a must to build a strong business credit report and score.

Here are some common factors that could affect your business credit score:

  • How much credit do you have
  • How long you’ve had credit
  • How many late dues do you have on your credit report

You can try to buy a business credit report to help you maintain track of your company’s credit health. It is regardless of which credit reporting agency you choose.

Business Credit Reporting Agencies

There are many business credit reporting agencies you can trust. In most cases, all company credit reports contain the same information. They have common key data components even when they have a unique process for validating and collecting data.

The following are some of the most well-known business credit reporting organizations.

Dun & Bradstreet

It is the credit report that is most widely used. D&B assigns credit ratings to businesses based on many indices that represent their current and future financial risk.

Experian

To calculate its score, it gathers business data, payment and collection history, and financial data. The Credit Ranking Intelliscore from Experian goes from 1 to 100, with 100 being the highest attainable score.

The FICO® SBSS

It is most commonly used for SBA (Small Business Administration) financing. To generate a credit score, it gathers information from all three credit bureaus.

Conclusion

The more efforts you take to establish business credit, the more financial prospects your company will have. Banks, lenders, and suppliers use business credit reports to determine a company’s creditworthiness. So, make every effort to control your debt and keep on top of payments.

You can start to make paying bills on time a priority. Resort to make a budget, cut back on certain purchases, or set up payment reminders. Any late dues will have a negative impact on your company’s score. And it will make it harder to attract lenders, partners, or investors in the future.

Don’t hesitate to seek professional help from a financial counselor. It helps in times when your company does find itself in debt.

About the Author: Sharita M. Humphrey is an award-winning finance expert, money mentor and Certified Financial Education Instructor. Once broke and homeless, Sharita completely transformed her life and is now a successful entrepreneur and one of the most in-demand money coaches for individuals and business owners of color. In 2020, Sharita was named National Financial Educator of the Year.

4 Important Documents You Need When Applying for a Business Loan

March 8, 2022

Getting a small business loan is a daunting task for many company owners, simply because it can be time-consuming to gather all the documents needed to apply. If you’re looking to secure any type of financing to increase capital, having a checklist of the most common requirements will go a long way in expediting the application process.

Before diving right in, take note that lenders consider a number of factors when requesting documents. The requirements may vary based on time in business, your industry, credit score, and the type of loan you’re trying to get.

For example, applying for a business line of credit won’t necessarily require you to have a good credit score, although having solid financials will mean you’ll get lower interest rates.

On top of that, traditional lenders like banks and credit unions are stricter when approving loan applications and may require more documents to prove your creditworthiness. Alternative lenders, on the other hand, are much more lenient.

 

 

The business loan documents listed below are the most common requirements borrowers must submit to the lender they will be working with. If any of these documents are not submitted (or for some reason the information you provided is incorrect), your application may be at a higher risk of getting rejected.

Business Loan Application Requirements

  1.  Income tax returns

    Lenders require your most recent Income Tax Return (ITR) because it illustrates how well your business performed in the previous year. It verifies your income, and uses the information on your ITR to determine the amount of money they could loan you.
    Also, your ITR shows your debt-to-income ratio, which is the percentage of your monthly gross income used for paying off debts. If your debt-to-income ratio is high, lenders might consider you a high-risk borrower.
    To give you an idea, your debt-to-income ratio must be below 43%. You can calculate yours by dividing your monthly debt by your gross income. For example, if your monthly debt is $15,000 and your gross income is $55,000, your debt-to-income ratio is 27% ($15,000 / $55,000).

  2. Financial statements

    Financial statements are a critical barometer of your business’ success. They give lenders an overview of your organization’s financial position and cash flow.
    Like your ITR, financial statements are used by lenders to determine if your business is keeping up with expenses, what your income sources are, and whether you are generating enough money to take on another debt.
    There are three key financial statements you need to prepare beforehand: your balance sheet, profit and loss statement (or your income statement), and cash flow statement.

    • Balance sheet – gives you a general overview of your assets, liabilities, and stockholders’ equity
    • Profit and loss statement – gives you an overview of your company’s revenues and expenses. Your P&L statement will also show your net income at a certain period of time.
    • Cash flow statement – shows the inflow and outflow of cash in your business. This demonstrates whether the company is making enough money to pay its creditors, has enough cash reserves, and how much goes to operational expenses.
      Lenders use all these financial statements to evaluate your business’ financial health, as well as income potential. It is also used to check which assets may be used as collateral when applying for a business loan.

  3. Proof of business registration

    To prove your business’ legitimacy, you need to provide legal documents such as business registration, licenses, permits, articles of incorporation, copies of contracts with third parties, franchise agreements, and other documents that prove you are operating your business in good faith.
    In some instances, borrowers show their commercial lease agreements, payroll documentation, and certificate of good standing. This certificate indicates that the company is up-to-date with state-required filings and taxes, giving lenders a better idea of where your business stands.

  4. Good personal and business credit

    When applying for small business loans, you need to know both your personal and business credit scores. You can obtain copies of your credit reports from TransUnion, Experian or Equifax so you have an idea of your credit standing.
    To give you an idea, personal credit scores range anywhere between 350 to 850; meanwhile, business credit scores are any number below 100. For banks and alternative lenders to trust you, you must have a personal credit score of at least 580. This score shows lenders that you are a good payer.
    Here’s an instance: if you are applying for an SBA 7(a) loan, the minimum credit score requirement is 650. If you’re getting an SBA microloan, the minimum credit score is 620, plus collateral. For short-term loans, you may need a minimum of 540. Note that this will all depend on your qualifications, so you need to speak with a finance expert to discuss your options.
    If you’re having trouble on this front and think that your credit score isn’t in good shape, you may want to explore financing options from lenders who aren’t strict. No credit check business loans include a business line of credit, invoice factoring, and equipment financing, although you have to put up collateral to minimize the lender’s risks.

Don’t be afraid to ask

Understanding the ins and outs of business financing takes a lot of work. With so many options to choose from, you need to consult a finance expert to know the best funding for your business.

As for the documents, once you’ve prepared these requirements beforehand, you won’t have a problem during the application process. Provide accurate and legitimate information to your lender to secure a loan in no time.

ABOUT THE AUTHOR

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.