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Why banks won’t lend to a business

Written by Bizink | Sep 12, 2017 9:00:04 PM

When setting up a new business or preparing to upscale an existing one, obtaining financing is one of the first steps.

It is more difficult to be approved for a business loan or line of credit than it is to qualify for a personal loan. Therefore small business owners must ensure they are extremely prepared when meeting with a bank to ensure they're business is seen in the best way in order to qualify for the desired amount of money.

The following are ways to simplify the loan approval process.

Your business risk profile

The most important step of any loan application is to confirm to the banks that you will be able to make regular payments back and eventually repay the loan in full. This can be done by presenting your detailed business plan, cash flow statements, and your god credit history, if your business is highly profitable.

Often banks won't lend to small businesses if they show a lack of security, a non existent (or at least very poor) credit history, a business plan lacking precision or inexperience in running a business.

Know your credit score

You should review you credit score before you apply for any kind of financing. It give you a better indication whether you are in a good position to qualify or if you should wait till you can improve the score. Ensure your credit report is complete and free from errors that could affect your score. This report shows your history of payments for credit cards, equipment leases, electricity, phone, mortgage or office rental and any other business expenses. Any exclusion, no matter how small, can have an impact on your credit score that may reduce your chances of qualifying for a business loan. For example, your internet provider, which is always payed in a timely manner, doesn't appear on your payment history and this can cause your credit score to be lower than it should be. Therefore be sure to correct any errors straight away.

Before you apply for financing

If there is a chance the bank may determine that your business is too high risk or you've been denied financing, an alternative may be business credit. While you're spending limit is initially low, it gives you the opportunity to build up a good credit history. Make minimum monthly payments to eventually pay off the balance. Maintain other financial responsibilities, such as personal loan repayments, rent, leased items and any owing income taxes. In doing all of this, you can apply for a loan in six months to a year and you will have a higher chance of approval.

Ensure you have all the necessary documentation to support your application. These include banking statements, reports, a in depth marketing plan and a highly detailed business plan, showing projections for the future.

Also anticipate discussing why you need the amount you're seeking, the length of term and how the business can afford to repay it with the bank. You'll be in a good position to qualify if you can demonstrate a strong case through profitability, good credit history and a sound business plan.

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