Need Funding? 3 Things to Avoid to Get Your Small Business Loan Approved

It's more than disappointing when you don't get the loan you were counting on for your small business. A loan disapproval can lead to interrupted plans and questions about what went wrong.

Before asking for a small business loan — and to better prepare your application — consider three things that may jeopardize that funding request.

Incomplete or Missing Documents

A documentation-related misstep is one of the most common reasons for denying a small business loan.

This reason makes sense given the pile of documents required, from bank statements and tax returns to proof of business registration, business licenses and permits, and financial information.

And some lenders are also asking for personal and business credit reports, along with other documents connected to your business, such as leases, contracts, permits, and licenses.

"It could be that the applicant didn't fill out the application correctly or didn't provide all the necessary supporting documents," says finance expert and money mentor Sharita Humphrey in an article submitted to the Albert Lea Tribune.by SCORE mentor Dean Swanson.

To avoid these types of issues, make sure you get all the documents in hand before submitting your application.

"Then, make sure to double-check everything," Humphrey advises. "Also, don't forget to carefully go over each step of your loan application to ensure that you fill it out correctly."

Credit expert and personal finance writer Michelle Black agrees — she advises small business owners to set enough time aside to organize and prepare documents.

"No matter how long it takes, you need to track down and provide every tax return, bank statement, business license and other documents the lender wants to see," says Black, founder of CreditWriter.com and HerCreditMatters.com.

"If you put in the effort to follow through on every request, you may be able to remove obstacles that are preventing you from qualifying," she writes in a Forbes Advisor blog.

Poor Credit History

No surprise that a lender considering your loan application is looking at reported information about your finances.

"Your business credit details tell lenders how your business has managed credit obligations in the past and whether you're likely to pay debts on time in the future," says the Forbes Advisor blog by Black and Jordan Tarver, assistant editor for loans at Forbes Advisor.

Among other things, lenders are looking at whether you've previously defaulted on loans, have missed payments, or maxed out credit cards — all factors that could lower your FICO score.

"This, in turn, can affect how lenders perceive you as a potential borrower," Humphrey writes in the SCORE blog.

"Other reasons why business loans get rejected include not having enough credit or having little to no credit history."

Not Enough History

This can be a tricky one. If you're a startup, extra funding to see your small business through the early days is likely necessary.

Yet if you are a new business, you may not have established enough business credit history to be eligible for some business financing. 

It's reminiscent of the plight someone new to the workforce or a recent college graduate might face - not enough work history to get a job, yet no one will hire them to get the experience they need.

"Of course, it's entirely possible for you to have solid finances and run a successful business even if you haven't been operating for long," Humphrey says.

To get around the too-new scenario, look for loan opportunities better suited for your business situation, such as lenders that offer startup loans, a type of financing that's accessible to those with limited — or no — business or credit history. 

Also, new small business owners want to be sure they're building a credit history. 

"Vendors don't always automatically report your payments to the business credit agencies," according to Humphrey. "So, whenever you set up an account with a new vendor or supplier, make sure that they report your payments. This will help your business build up a good credit history."

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