Let’s face it, these days there are hundreds of excuses that a bank could come up with to deny your loan request. I manage a small business microloan program in Indianapolis that tends to make loans to small businesses that have already been denied by the bank. I have heard many reasons, but there are 3 things that come up again and again.
1. Less than 2 Full Years in Business – The banks must use data to show that after a business makes it past year 2 their chance of survival increases substantially, because almost every traditional bank I know will not lend to a business less than 2 years old. Something to keep in mind here is that banks determine how long you have been in business by your tax returns. So you must file your business tax return in the first year even if you don’t have much to show yet.
2. Bad Personal Credit – Unfortunately for many business owners, your personal credit history impacts the ability to get credit as a small business. In the early years of a small business the financial situation of the business and the business owner go hand in hand. It takes a lot of time, and a lot of paying your bills on time to establish credit for the business that is looked at separately from your personal credit. If you have bad credit, the best thing you can do is to use credit and pay your bills on time. Sometimes business owners with past credit problems just tear up their credit cards. Unfortunately you can’t increase your credit score if you never use credit. Responsible and wise use of credit will improve your score over time, and help your small business secure bank financing.
3. Scary Industry – It is very common for banks to have internal policies that keep them from making any loans in certain industries. Restaurants are a good example. Banks avoid funding new restaurants like the plague because so many fail. I think the reason that so many restaurants and coffee shops fail is because everyone thinks they can own a restaurant. They think, “Hey I know how to cook, I bet we could have a successful restaurant.” What these hopeful entrepreneurs fail to realize is that the food has very little to do with your chances for success. Just take McDonalds for example, they sell more hamburgers than any other company in the world, yet I can count 100 places to get a better burger just off the top of my head. There are certain industries like restaurants and sometimes construction that just keep the banks running in the other direction.
These are just a few of the reasons that you will get a quick no from the bank, as I mentioned there are many more, as there seems to be an endless supply of reasons for the big banks to deny your small business loan request.