While the economy is improving and many small business owners feel optimistic about the future, it can still be a challenge to access the financing they need to fuel growth or fund working capital. Not all lenders look at the same criteria when evaluating whether or not they’ll approve a small business loan, but here are three red flags that could put the brakes on any loan application:
- You have a bad personal credit score: With the exception of maybe the biggest and most tenured small businesses, the need for a business owner to maintain a good personal credit score will never go away. With a personal credit score below 680, for example, it’s unlikely you’ll find success at the bank. And the SBA threshold is around 650 for most applications. Some non-bank lenders will approve a loan with a lower credit score, but will want to see other metrics in place. If your personal score is struggling, making improvements will help increase the odds of success when you need a small business loan. The first step is to find out where you are. Annualcreditreport.com is one place you can access a free copy of your credit report once per year. You can also check out the three main personal credit bureaus, Experian, Equifax, and Transunion, who all offer low cost credit monitoring.
- Your business is an early-stage startup: I call it the “Myth of the Shark Tank.” While investors like those on the hit TV series will sometimes invest in an incredible idea, most lenders want to see a track record, healthy revenues, and some experience in the market. That’s not to say a loan is out of the question. In fact, if your personal credit score and other factors are in place an SBA loan could be a possibility. As a rule of thumb, most lenders want to see at least a year in business so many entrepreneurs in this stage of business turn to friends and family or wind up bootstrapping the first couple of years. Crowdfunding and non-profit micro-loans could also be an option depending upon the mission of your business and your ability to persuade others to help you achieve it.
- You don’t have any revenues: Unlike equity investors, like angels or venture capitalists who are willing to invest in your business for a future payout when your business either sells or goes public, a lender wants to validate you will be able to make regular and timely payments. If your business has no revenues (even if you have a great personal credit score), unless you can demonstrate income from another source to make loan payments, it’s unlikely you’ll be approved for a loan. I once spoke with an entrepreneur who had a good business plan, a developed marketing approach, but needed money to execute. His poor personal credit score and lack of any revenue made it impossible for him to find a business loan. I suggested he start smaller, build some business revenues, and improve his personal credit score. He was dismayed that he couldn’t execute his business plan, but sometimes you need to get a year or two of revenue under your belt before you can get financing.
Most lenders want to mitigate the risks associated with making a small business loan. If you can convince the lender that making a loan to your business is less risky that the last small business owner he or she talked to, you’ll improve the odds of success. A loan officer once told me, “I don’t know anyone who likes to say ‘no’ and turn people away—but there are times when I have no choice.”
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