For a lot of people starting or looking to expand a business, taking out a loan is a necessity.
Having extra money which you can invest into the business can help to generate more sales and therefore profit. Applying for a loan is consequently integral to many businesses’ success.
However, the rejection rate of busines loans for SMEs was observed at 18% in 2018. This means that there is a good proportion of people who haven’t found it possible to propel their business to the next level due to lack of funds. Previous experiences of unsuccessful loan applications have also deterred many business owners from applying for finance during the Covid-19 pandemic.
As a business owner, it is therefore vital to understand why loan applications may be unsuccessful and what you can do to increase your chances of success. Here are our handy tips so you can be confident when applying for your loan.
Reasons Loan Applications are Rejected
Having a poor credit history can be detrimental to your loan application as it can demonstrate that you lack diligence when it comes to paying loans back. However, for some people, debt is often an unavoidable reality. Therefore, if you have a credit score of below 700, you should try to build up a higher score and attempt to drive down debt before you make your application.
Your cash flow will determine if you can ultimately afford your loan. You should analyse your cash flow quarterly and attempt to optimise it where you can before making a loan application. This will also help you to accurately predict how big of a loan you can afford.
Additionally, you should have a detailed and well thought out business plan in place. This will include an overview of who your company is and what they do, your offerings, and your finances. Having a plan will appeal to the lender as it will show that you are prepared and aware of the money you spend.
You should also be aware that sending too many business applications off at once can be a red flag for some lenders. Don’t throw out applications to anyone in the hope that at least one lender will approve your application.
So, now you know what makes for a bad loan application, but what makes a good one?
Tips to increase chances of success
Before applying for a business loan, you should try to shop around for the best lender as there will be different lenders more likely to accept you based on your needs. For example, if you have a low credit score, it’s wise to apply for a loan from a specialist lender.
Again, before you even consider applying for a loan, dedicate some time to improving your credit score and check that your records are correct and up to date. This will improve your chance of making a successful application and reduce the time of an already lengthy process.
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As mentioned above, take time on your application and don’t simply throw out as many applications as possible. Ensure you have all the relevant information prepped beforehand to make your application appeals to lenders and demonstrates that you’re in a stable position.
By following these tips, you can increase the likelihood of having a successful loan application the first time round!