1. No Business Plan
Even if you own an existing business, lenders will want to see a business plan when you apply for a loan. Your business plan should show the lender how you will use the money you plan to borrow, as well as how you plan to pay it back. It is important to outline how and when your business will monetize to prove you will have the money to repay the loan. Additional information to include are an org chart, timeline, and other sources of income, if applicable.
2. Bad Personal Credit
You are most likely going to need to provide a personal guarantee for the loan. This means, if the business cannot replay the loan, you will be personally liable. Therefore, good personal credit is required to qualify for a business loan. This does not eliminate the business’s requirements, you will also need good business credit as well. A good credit score is considered 680 or above.
Here are the credit score ranges:
800 and greater = Exceptional
740 to 799 = Very Good
670 to 739 = Good
580 to 669 = Fair
579 and lower = Poor
If you are unsure what your personal credit score is, you can check it for free using Credit Sesame. We also recommend monitoring your credit and identity by signing up for a plan through our partner, Experian’s IDnotify. These plans are a la-carte, and you can customize which information you want monitored.
3. Insufficient Collateral
Bottom line, most lenders will not lend money without collateral. And many lenders require collateral in addition to a down payment. They generally require collateral as an insurance policy in case you default on the loan. The various types of collateral lenders look for are assets, equipment, or property.
4. Not Enough Down Payment
Very few lenders offer unsecured business loans. Therefore, if they do, they will require a 20% cash down payment. The down payment will be used to reduce the risk of default. Even if you have an excellent credit score, many lenders will still want a 20% down payment. However, if you have a bad credit score, which is anything under 680, you may be required to put more money down. It is important to show good faith to a lender by putting a down payment on a loan.
5. No Proof of Profitability
This applies to business loans that already exist. Essentially, the lender will want to see 3-years of profitability in addition to the collateral and down payment. Proof of profitability proves to the lender that your business has sufficient income to repay the loan. Lenders consider start-up companies and start-up loans higher risk because there is no proof of profitability. Additionally, many lenders stay away from start-up loans because the business may not monetize, leaving the borrower unable to repay the loan.
To sum it up, you will need to sell yourself to the lender when seeking a business loan. You will need a business plan, good personal and business credit, collateral, a down payment, and proof of profitability to quality. All lenders are different, but most lenders generally require these key things.