Today we will consider the top reasons business loans don’t close. We will review the most common reasons and how to avoid them. Applicants can get their loans closed by preventing these problems.
Not being able to Prove Ownership
Business owners sometimes have trouble proving ownership of their business. The Secretary of State often lists the Registered Agent and Officer, but does not list or clarify who the owners are. Officers to not have to be Owners of the business. Another problem is that ownership percentage is not not listed. Owners often have to provide their Articles of Incorporation or business license to prove ownership, which many times they do not have on hand.
Not being able to provide proof of the existence of the business
Some States do not require a business license to operate a business. The owner will operate the business in their personal name and say they run a business. They will not be able to get a business loan because they cannot prove the existence of the business the way Lenders require it.
Cannot prove time in Business
Businesses often begin as a Sole Proprietorship or Partnership and Incorporate later.
When this happens, the Secretary of State will only show the time in business since the time of the Incorporation. The time the Company was a Sole Proprietorship or Partnership will not be added.
For example, if a Company was Unincorporated for 3 Years and has been incorporated for 2 Years, it will only show on the Secretary of State as 2 Years Time in Business. If the Company wants credit for the full 5 years, they should provide the business licenses since it began as a Sole Proprietorship. Lenders will give the Company credit for the full 5 years.
Business Account balances are too low or overdrawn at the time of closing
After a business is approved for a business loan, their Business Checking account may be reviewed before closing. This will include a review of the current balances, the Month to Date balances, NSF’s and Overdrafts within the last 30 to 60 days. If these are too many NSF’s and overdrafts, the Lender may withdraw the approval. Review your balances and activity to make sure this will not impact your approval.
Cannot pass bank verification
Many business loans require a verification of the business bank account. This is often done through 3rd Party Vendors such as DecisionLogic, and Joinme. Bank verification can also be done through phone verification.
The business cannot provide all of the documentation required in the closing stipulations.
Business loans have a list of closing requirements that have to be met. If the applicant can get most of them but not all of them, they may not be able to close the loan. If you fall short in getting the Documentation required to close a business loan, talk to the Lender about what is missing. You may be able to get the remaining items waived. Another option is to provide substitute information. Many times alternatives to what was asked for may be accepted.
Businesses want money for many reasons. This post will look at the 10 most common reasons businesses want a business loan and some of the best programs for them. If your business needs a loan for any reason, complete the application information below.
10 Most common reasons businesses want a business loan
1) My business is running out of money.
Very often, businesses do not need money for a specific reason. They just are running out of cash. Seasonal businesses often have this problem. Sometimes revenues do not meet business expectations while expenses remained fixed. The business may have run into problems and needs money to correct or resolve the problem.
2) I need a business loan for expansion.
One of the top reasons businesses need a business loan is for expansion. There are many reasons for expansion. In most cases, a successful business wants to take advantage of business opportunities but needs more money to do it.
3) I need a business loan for taxes.
Customers frequently make the request, “I need a loan to pay business taxes”.
Many businesses need a loan to pay taxes. This is often
for current taxes, previous taxes as well as IRS payment agreements.
4) I need a business loan to hire employees.
Another reason businesses often need capital is for the initial expense of hiring employees. This often includes the cost of expanding the workspace, buying furniture and also the cost of recruiting, interviewing and adding employees to the employee rolls.
5) I need a business loan for inventory and raw materials.
Businesses often need funding for inventory and raw materials. Business
owners need specialized funding for this purpose.
6) I need money for Equipment, Equipment Repairs or Vehicles.
Businesses often call in with the request, “I need a business loan for
equipment”, as well as “I need a business loan for equipment repairs”. This would
be considered a loan against equipment.
7) I need a business loan for Marketing and Advertising.
Companies frequently need a business loan for Adverting and Marketing. Advertising is more critical for certain industries than others. Industries that need advertising, such as media companies, retail and online businesses have to spend significant funds on
8) I need a business loan to buyout my Partner.
Businesses will often request a business loan to buy out another partner. Multiple owners are no longer able to get along well enough to continue running the business together. Callers will call in saying: “I need a business loan to buyout a partner owner.”
9) I need a business loan to buy a Building and Real Estate.
When businesses become larger, they not not want to keep leasing space. Landlords may also suddenly raise the rent. Callers most frequent requests are: “I need a business loan to buy a building and property”, or “I need a business loan to buy my building.” For this
purpose, callers say they need an asset based loan.
10) I need a business loan for insurance.
Businesses may need to pay for several types of business insurance.
Liability insurance, employee insurance and property insurance are some of the types of insurance businesses must by. Callers will also call in and say: “I need a loan for business insurance”, as well as “I need a loan for business health insurance.”
Thank you for visiting our list of the 10 most common reasons businesses want a business loan.
1. Running out of Money. Running out of money is probably the main reason for going out of business. There are different circumstances under which businesses run out of money. The business is going through a slow period. Revenues have been low since the business opened.
3. Too much debt and overhead. The owners or the business itself may have too much debt and overhead to deal with. They can’t handle it and go out of business.
4. Insufficient starting capital. Many businesses never really had enough capital to start. Often there are problems after opening. This is followed by the business not having enough capital to overcome them.
5. Unable to get financing or enough financing. Many businesses need working capital or other types of business financing after starting. Some of these needs are critical. If they cannot get the financing needed for equipment or short term working capital, the business may not survive.
6. Not enough back up capital or emergency capital. Business owners have liquid assets and net worth. If the business needs more working capital than
7. Bad Employees. This is usually employees that are bad performers with low quality work and low production. Some employees are out sick on leave a lot.
8. Bad Marketing and Sales. Some businesses have owners with expertise in certain areas. They may have technical but not sales and customer service. These other areas can be crucial to the survival of the business.
9. Inflexible ownership. This is resistance to change or new ideas. Many business owners have aggressive take charge personalities. This is often what drives them to accomplishing starting a business. It can hurt some business owners significantly. Many business owners are not open to new ideas or alternatives different than the ones they believe in. They are often very resistant to criticism.
10. Market changes. Businesses need to keep up with what is happening in their industry and stay up. Some businesses show poor awareness to market trends and changes.
11. Not keeping track of competition. Businesses that do not keep track of what the competition is doing may be left behind. Competitors may introduce new products, programs and incentives.
Businesses are declined for business loans for many reasons. Below are the top 6 business loan decline reasons. Your business can do several easy things to prevent many of these declines. Use the following list to increase your chances of getting approved for a business loan by avoiding the decline reasons listed.
Don’t let your business get turned down for any of these top 6 business loan decline reasons. Top 6 business loan decline reasons
1. Derogatory Personal Credit. Poor, damaged, or delinquent personal credit of the owner is
the main reason for being turned down for a business loan. Most businesses are less than 35 employees and the personal credit of the owner is usually part of the credit review. If the personal credit score of the owner is low, there are some steps that might be taken to minimize the impact.
Short term Solutions: A. Spend time researching different business loan products before applying. Try to apply for business loan products that have less scrutiny of the owner’s personal credit. If possible talk to the lender first. Find out how much of an impact personal credit has on their business loan product. B. If there are multiple owners of a business and one owner has better credit, the owner with the better credit should be the first applicant. If the owner with the better credit is over 50% owner, the application may be approved without the other owner. This may prevent a decline for weak credit. The 2nd owner may not even be required. Longer term solutions: A. Get a copy of your personal credit report. Look for errors. If there are errors, you can dispute them with the credit bureau. If they are removed, your credit score will go up. If there is derogatory credit, look at how old it is. If it is close to 7 years old, it may be on the verge of dropping off your report. You will then know your credit score will go up once it drops off. Limited credit may also be an issue. If you have limited credit, this may be a time to consider what accounts you can add to your credit bureau.
2. Derogatory Business Credit. Businesses can have derogatory business credit. This derogatory business credit may appear on a business credit report. Examples are State Tax liens, Federal Tax Liens, Suits and Judgements, Past Due Accounts and Collections.
A. Get a copy of your business credit report through Dun & Bradstreet or Experian Business credit report in advance of applying for a business loan. If there is incorrect information, the process of correcting it is similar to the process of correcting incorrect credit reported on your personal credit. Contact the business credit agencies and dispute the incorrect information. If the business credit agency cannot verify the derogatory credit, it may be removed from your file.
3.Insufficient Cash Flow. This is sometimes also referred to as negative cash flow or unacceptable cash flow. Businesses are often declined for a business loan due to insufficient cash flow. The official decline reason varies, though the basic reason is the same. The lender believes that the business does not have enough cash flow to handle the new debt. If the lender is reviewing a P & L, Profit and Loss statement and it is showing a negative net income, that may a decline reason trigger.
Overdrafts, also referenced as “OD” and Insufficient funds, also called
“NSF” or “NSF’s” happen because of poor cash flow or insufficient cash flow. How to avoid this decline reason: A. If your business is declined for this reason, contact the lender to discuss it. There may be alternative solutions. Your business might be approved for a lower amount. This can include a starter line. A starter line line is usually a small line that the lender offers just to get the relationship stated. Lenders sometimes do this with borderline decline instances. They want to take a small risk hoping that the borrower will develop into a good long term customer.
Weak financial statements. For many types of business loans, financial statements are still required. This is more often the case when the terms are very favorable. If a companies financial statements are weak and show a low net income, decreasing revenues, or other weaknesses, it can easily cause a decline.
How to avoid this decline reason:
4. Collateral. Some loan products are asset based. In these cases, the Collateral must be satisfactory or the business loan will be declined. This is the case for Real Estate backed loans, Accounts receivables financing, or Equipment Loans. Even if the customer has excellent credit and time in business, if the assets do not have enough value or other conditions are not here, they may be declined.
5. Time in Business. The time in business requirement varies from one business loan product to another. For some lenders 2 years or more time in business may be required. Ask the lender if there is a time in business requirement. If there is, ask if it a hard and fast rule. For some lenders, if the applicant has other strengths in their profile, it may override the time in business requirement and be approved.
6. Industry. Some lenders will decline a business just for being in a certain industry. Often business do now know when applying the lender won’t even loan to their industry. This is an easy decline to avoid. Put this in the list of questions to ask a lender before applying. Do you lend to my type of business? Sometimes lenders have preferred industries that they lend to. Some lenders have industries that the do not considered favored industries. They may consider your industry as challenged or place it in a more difficult to loan to internal category. Ask the lender: Is my industry a preferred industry you lend to? Not all of these 6 top business loan decline reasons have to be corrected. Some cannot be corrected. The steps that should be taken are on a case by case basis. Every company has different hurdles to being approved for a business loan.
Using some of the tips above and your business can overcome many of these top 6 business loan decline reasons and get critical business capital.
In summary, the top 6 business loan decline reasons are:
Should you worry about any more decline reasons? What are other steps you can take? There are others to consider besides these top 6 business loan decline reasons. Others include declines for key financial ratios such as debt to income and declining revenues. In some cases, the business is approved but not with the terms the business wants to accept . These reasons are less frequent. They can be acted on differently. Additional action steps in addition to the top 6 business loan decline reasons.
Thank you for visiting this page on overcoming the top 6 business loan decline reasons.