Applying for a Small Business Loan? You Need to Know About These 7 Hurdles

Applying for small business loans can be frustrating, and according to some surveys, lenders reject roughly 66 percent of applications. Three of the most common obstacles to getting SBA 7a loans are poor credit scores, lack of business assets and no business plan, but beyond that, there are other hurdles in the process.

To improve your chances of getting your 7a small business loan application approved, you need to understand and avoid the following hurdles.

In one survey, over half of all small-business owners said that they have never checked their small-business credit scores. If you want to be successful, you should not be in this majority, and ideally, you should understand exactly what your small-business credit score is before submitting your loan application. If necessary, you should also take steps to improve your score as needed.

In most cases, when assessing a business’s creditworthiness, banks use the scores from the FICO Small Business Scoring Service. Abbreviated as FICO SBSS, this score is on a scale of 0 to 300.

Whether your business credit score is high or not, many lenders require a personal guarantee. In fact, you almost always need a personal guarantee if you are borrowing $5 million or less. That means you need a strong personal credit score, healthy finances and personal collateral.

With small business funding, you can apply for conventional funding or SBA-guaranteed loans. The latter are usually slightly easier to qualify for because the banks incur less risk. If you default on the loan, the SBA ensures that the bank doesn’t suffer any losses.

However, if you’re applying for an SBA loan, it’s critical that you understand all the required criteria. In addition to credit requirements, your business must not be on the list of banned industries, which include life insurance companies and real estate investment firms.

Additionally, you must not be behind on any government-backed loans — that includes personal loans like your mortgage and student loans.

Unfortunately, many small businesses don’t have adequate documentation to apply for a business loan. Ideally, you need profit and loss statements, cash flow summaries, sales and expense reports and a range of other documents from the last few years.

The more information you have, the more accurate of a picture you can paint for the lender, and the more likely your loan is to be approved.

In addition to having the right documents, it’s also essential that the documents show the right things. In particular, banks want to see quality earnings. For example, consistent payments from repeat clients over several years tend to be viewed more favorably than one or two “lucky” deals.

Similarly, lenders may also look closely at your cash flow statements to get the real story behind the numbers. For instance, if you have a lot of cash because you stopped paying your vendors, that’s a sign that your business is doing better on paper than it actually is in reality.

Although it’s critical to have ample documentation, you don’t want to weigh down the lender with unnecessary paperwork. It’s critical to present your business plan and a picture of your business finances in a well-organized fashion to your lender.

At Financial Consulting, Inc., we are experienced in helping our clients get the funding their businesses need to grow. Whether you’re applying for conventional loans or loans guaranteed by the SBA or the USDA, we’ll help you create clear-cut presentations that truly get results. Contact us today to learn more about SBA 7a Loans.