When a business is denied financing...


Pitfalls Business Owners Face When Applying for Financing

2018-06-29 10:28:46
Tracy Becker

Rejection is a hard pill to swallow – especially when you’re trying to grow your business or expand operations but get denied for much needed financing.  Most lenders or creditors look at many variables before extending credit – especially if you’re looking to get the best interest rates. They will scrutinize your company history, finances, and credit to determine risk.

Common reasons for business financing denial:
  • Poor or limited credit (business & personal)
  • Young business
  • No collateral
  • Loads of debt
  • Limited cash flow
  • Poor record keeping

Many business owners overlook the impact that business credit can have on their application. They may assume that their company credit history and scores are strong because they have vendors and creditors that are being paid or they just know very little about their business credit profile and how it works.  Business credit can impact companies in many ways and can be viewed by any party, there is no obligation or regulation that forces the viewer to gain permission or acknowledge they have reviewed the businesses credit. There are many scenarios that can end up costing your company profitable opportunities due to poor or limited business credit.

What can a business owner do if denied for a loan?

First, don’t keep applying before you do your homework. Excessive inquires on business credit can damage your scores and bring you back to square-one if nothing on your credit has been updated or repaired. Speak with the creditor or lender who denied you.  Ask them why you were denied but don’t expect that you will always get the facts. Get a copy of your personal and business credit reports/scores. Evaluate where your credit is with a credit expert who knows about business loans as well.  When it comes to business lending there is limited regulation, unlike personal credit, lenders may choose not to disclose information on why you were rejected.  In many cases the business lending representative you are working with may not have been told by underwriters all the factors that generated the denial. They may not even know both business and personal credit were used in decision making.

With a written request the business credit bureaus usually provide a free copy of your company reports and scores after application denial. Make sure to get all three reports – Experian, Dun & Bradstreet, and Equifax.  Keep in mind when reading the reports, the bureaus are not required to disclose information on each vendor who is reporting. This is to protect your privacy, so competitors don’t try use your partners, vendors, and creditors.  It’s very common for reports to include industry codes for the vendors but no other distinguishing information. This lack of transparency can make it hard to recognize whether the debt is being reported correctly.  Many business loans require a personal guarantee as well, order your personal credit and review the reports thoroughly but make sure you are ordering all three FICO scores used by lenders.

The next steps will vary based on why you were denied:
  • Let’s say for instance that you were denied based on a lack of information on your reports, you would need to take the initiative to begin building business credit. Building business credit is not an overnight process it will take time to establish lines of credit and knowledge of what accounts will update to business credit.  Some company’s start placing orders to build their profile and have no idea whether the creditor updates payment information to the bureaus. Most vendors do not report positive payment data – this is what makes business credit building so tricky. Depending on the company’s needs you might want to use our building business credit DIY system or our concierge building business credit
  • Maybe your business has established lines of credit, but you are now aware of negative or incorrect information damaging the scores. It is very common for erroneous information to land on business credit reports. In this case, you would need to consider repairing your business credit. This is a timely and complicated process, if not handled properly you can end up causing greater damage to the reports.

When a company needs fast-cash, but gets denied traditional funding, it’s easy for them to justify reaching for high-interest options. If you’re able to hold off for a bit or when using high cost financing, take the time to focus on a way out soon. It is more beneficial to your future to spend the time repairing and building the company scores. This will save a lot of money, maintain a higher profit, and stability for the company.

Here are steps that businesses must take when applying for financing that will help them prepare for approval.
  • Review business and personal credit with an expert so you fully understand how it works and what threshold would be viewed as excellent credit and place you in the low risk borrower category
  • Monitor business (and personal) credit reports.
  • Maintain strong financial records that include profit and loss reports, balance sheets, and a list of assets and debts.
  • Be able to provide several years of tax returns.
  • Be prepared for any large upfront costs that may be associated with the loan you’re applying for.
  • If you’re looking for a startup loan, make sure to have a detailed business plan prepared that explains why you need financing and how you will pay it back.

North Shore Advisory offers two business credit building programs – A DIY Program through our website NationalBizCredit.com and a Concierge Program that is done in-house by our team of Credit Experts. We also offer a Business Credit Repair program for companies with established profiles who need damaging information removed. We will customize our services to fit the needs of your unique business. Reach out to us today for a free consultation.

Pitfalls Business Owners Face When Applying for Financing
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