What are the main factors that can affect your business loan being approved?

By Anita Jaynes on 27 June, 2022

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If you are deciding whether to take out a business loan for your company, it’s important to consider factors that might prevent you from having your loan approved. Being rejected can hinder you in the long run and eventually make your situation more complicated. Considering the factors below will help to increase your chances of success and make you more likely to get the required loan.

Credit History

Having a bad credit score can negatively affect the likelihood of having your business loan approved. If you do manage to get a loan, it is more likely that this will be of a lower amount and a higher interest rate due to the lender taking a higher risk. There are a few ways that your credit score can be improved – firstly it is advised that you try to pay off any debts you currently have if possible. Following this, ensure that you carefully manage your finances by making payments on time and limit credit applications in the future.

Collateral

Requesting a large sum of money and not providing collateral in case of a failure to make payment can look risky to lenders and lead to the rejection of a loan. Company assets as security towards the loan is a sure-fire, albeit risky, way to increase the chances of your loan being approved. This way, parts of your business can be sold to pay off the debt if usual payment is not possible. Asset-based lending means you are not left with tons of debt that can negatively impact the future of your business, and you don’t need a high cash flow in order to be approved by a lender.

Lack of Cash Flow

The funds that you have coming into your business is a strong determining factor for whether your loan will be approved. Lenders will use this information to assess how affordable the loan is and if you are able to pay these expenses back. If your business is in the pre-launch or early phase, it’s vital that you produce estimates for your cash flow, making them both accurate and realistic.

Lenders will expect you to have a lower profit margin at the beginning – what they want to know is how you will prepare for ups and downs in the revenue cycle. For businesses with a longer history, it may be that you need working capital to help fund more employees, marketing or equipment. If you can show how these changes will lead to a higher net income, then lenders will be more likely to approve your application.

Poor business strategy

Developing a transparent and coherent business plan can make you seem confident in your strategy and help you to achieve financial stability. Lenders are more likely to trust in your concepts and not feel as though they are taking as much of a risk. The majority of lenders will ask to see your plan when meeting, so be sure to supply an efficient summary of your main business and financial strategies.