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Why Some Business Loan Applications Get Denied

Written By Devi Kristanti on Wednesday, October 1, 2014 | 6:52 AM


Many people who wish to start their own business or to expand their existing one need an injection of financial capital at the beginning of a business; as we all know, the main source of funding for entrepreneurs is business loans.

There are few common mistakes we make while applying for a business loan or during the processing of the loan which can result in a rejected loan application. I will try to present a few of them which will help you understand the what you need to ensure that your next business loan application will not be rejected or why your previous loan application was rejected.

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Lack of planning

Before applying for a business you need to do some homework and make certain plans about how you are going to approach your lender and how you can ensure that your loan application won't be rejected.

Do some homework -- First of all you will have to decide the type of loan you need then do a good research on the lending market and find out which lenders are best suited for you. List them in the order of interest in the market in which you are in. It will help you determine who is most interested in your business and is willing to help you succeed. After you identify the right lender or bank, make it sure that the lender understands your business and what you're aiming for.

Documentation

Once the planning part is completed the next step involved is collecting or organizing the required documents. This step also needs to be done with a cool headed approach so that you can make sure all the necessary documents are ready.
Keep this on mind that all statements in the application will need to have supporting documents so make sure to gather them all.
The following are some of the documents which you will find necessary.

Credit report

A consumer credit report is a factual record of an individual's credit payment history. Its main purpose is to help a lender quickly and objectively decide whether to grant you credit. If your report shows a mistake, contact the credit reporting agency and demand a correction. An explanation letter should be included with your loan application if your credit report shows legitimate late payments or bankruptcies, this can reduce the negative impact of these black marks on you during the processing of your loan application.

A professional looking business proposal

In addition to standard loan documents, a lender expects to see a written proposal when someone applies for a business loan. This is your chance to highlight the most exciting and promising aspects of your business and to prove to your lender that you're a prime candidate for a loan. The proposal must include a description of your business, the amount of funds requested, it should also include why you are seeking for the funds and the amount that you will contribute. The proposal should tell how you are going to repay the funds. This is what supposed to serve as a basis for your loan application.

Tax returns and other financial papers

It is important to be presented with your tax returns and other financial papers from the preceding two years - for both yourself and your business, so make sure you have them all ready before going ahead.

Application Form Errors

The next step in the process is preparing the application. It should me made sure that no mistakes are there in this vital step. Some of the common mistakes are.

Incomplete Application, Inaccurate Statements, Incomplete Financial Disclosure, Unsigned and Undated Application, Illegible Writing, Handwritten loan documents and Lack of supporting documentation for the statements in the application.

Interview Mistakes

Once you have your application ready the next step will be the interview with the loan officer of the lender. Once the interview starts get ready for the following questions to be shot at you. These questions are common in most of the loan interviews.

1. Why do you need the money?

2. How much do you need?

3. How do you plan to repay it?

So prepare yourself to answer them properly and in a way that the lender or the loan officer will finally say "Yes, your loan is approved".

You should be prepared to explain to the loan officer about what are your plans to make the most out of the funds issued, it is also advised carry all those documentations which will make it clear to the lender why it is not risky to approve your loan. Try to convince the banker about how perpetual your business is and your ability to repay the loan.

OK now let's list the common mistakes committed during the interview.

1. Obviously, not being prepared enough to answer the above mentioned questions.

2. Not maintaining a healthy debt-to-equity ratio -- debt-to-equity ratio refers to the amount of money you are borrowing compared to the amount you have invested, if you are not ready invest a good share of the money in your project it can make your project look skeptical.

3. Not being prepared for the objections that the lender may raise-Answer all questions honestly and with enough documentation to support whatever statement you make. do not have sufficient information about a concerns raised by the lender just tell him or her that you will provide them the required information soon as it is available to you and l the lender back as soon as you feel that you can provide the required information.

4. Showing a low confidence level -- Dress professionally for the interview, Make the lender feel like you are an entrepreneur who can and will repay the loan if issued. You may boost the image of your business by providing additional details about your business, this can be done in the form of materials like brochures, articles, press releases, testimonials, awards received etc.

5. Not discussing the risk involved in your business -- All business has a certain amount of risk involved, and if you don't discuss it with the officer there is a high probability for him or her to think that you haven't thought about the risks involved with your business. However it is recommended that you concentrate more on the positive sides than the negative ones while talking to the lender. Tell the lender about the risks involved and explain why chances to meet with the risk are minimal.

Other Reasons for rejection

Improper money management

Lenders are always impressed with businesses owners that manage their money well. So if you are someone with the following qualities it is difficult to get your loan approved:

- Frequent bounced checks

- Low bank balance

- Frequent overdrafts

- Delayed credit card repayments

- Have defaulted on previous loans

- Sued for non-payment or late payment by suppliers

Not asking for feedback from the lender who denied your application previously

Whenever you meet with denial of a loan application, ask the lender or investor to provide you with some feedback or the reasons why he or she denied it. This can help you in improving those facts before you approach another lender.

So, next time you plan to apply for a business loan make sure you plan all the steps in the process carefully and that you are not committing any of these mistakes. If you do so then your application will be processed smoothly and the approved without any delays or objections.


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