By Matthew Gillman, Business Financing Expert & SMB Compass Founder
As you grow your healthcare practice, running out of funds is inevitable. When seeking financial help from friends and family is not an option, your best resort is to apply for small business loans. But what happens when you get denied financing? What could be the possible reasons for this denial, and what can you do to resolve them?
Lenders will consider a number of factors when assessing a loan application, and if your business doesn’t meet their criteria, you may find it difficult to secure funds. If your business loan application was recently rejected, we’ll break down why your creditor decided so.
- Poor business credit score
If you have poor business credit, getting approved for a loan can be challenging. This is because lenders see poor credit as a sign of financial risk. They may worry that you will default on the loan. This can limit your ability to grow your business or take advantage of new opportunities.
Having poor business credit can have other negative effects on your business too. For one, poor credit can make it difficult to lease commercial space or obtain insurance coverage.
In instances where you’ll be approved for a loan, having poor business credit would mean higher interest rates. This will make you shell out more cash in the future. Overall, poor business credit can significantly impact your company’s bottom line.
To give you an idea, the ideal business credit score is 75. Having this rating or higher increases your chances of getting approved for any type of business loans with terms and rates that are favorable to you.
- Not putting up collateral
Collateral refers to an asset that is pledged as security for a loan. The collateral serves as protection for the lender if the borrower cannot repay the loan. If the borrower defaults on the loan, the lender can seize the collateral and sell it to recoup their losses.
For most borrowers, posting collateral can help to get a lower interest rate on a loan and increase chances of getting approved for financing since it represents less risk for the lender. However, if you default on the loan, you stand to lose your collateral.
Lenders use collateral to reduce their risk and protect their investment. Without collateral, many lenders would be unwilling to provide loans to small businesses.
- Unclear business plan
One of the most important things that lenders will want to see when considering a loan for a small business is a well-crafted and thorough business plan. A business plan outlines the company’s goals, strategies, financial needs and expected outcomes, and provides lenders with a better understanding of the borrower’s overall financial picture.
For many lenders, seeing a detailed business plan is often a make-or-break factor in approving a loan. Lenders want to know that you have thought through all aspects of your business, including how to generate revenue to be able to repay the loan.
Having a strong business plan demonstrates that you are serious about your business and have taken the time to create a roadmap for success. Without a business plan, it’s much harder to convince lenders to provide financing. They may be concerned about the viability of your business or whether you have a clear idea of how you’ll use the funds.
- Lack of business experience
Lenders usually refer to your business experience as a way to assess your ability to repay the loan. They want to see that you have the necessary skills and knowledge to run a profitable healthcare practice.
Generally, lenders feel more comfortable lending money to experienced business owners because they already have a proven track record in keeping up with debts and paying their bills on time.
- High debt-to-income ratio
Debt to income ratio (DTI) is a financial measurement that calculates the percentage of an individual’s monthly gross income to pay debts. Lenders use DTI to determine an individual’s ability to repay a loan, which is an important factor in credit decisions.
A high DTI can indicate that an individual is struggling to make their monthly payments, and it may be difficult to obtain new credit. A low DTI, on the other hand, indicates that an individual has a good handle on their finances and is more likely to be approved for new credit. Lenders typically prefer borrowers with a DTI of 36% or less.
If you think that you’ve been denied a loan because of a high debt-to-income ratio, consider paying down some of your debt or increasing your income.
How to make sure you get approved for financing
When you’re applying for business financing, there are a few key things to keep in mind that will help ensure you get approved.
First, be sure to have a strong business plan in place. This will show lenders that you have a clear idea of how you intend to use the funds and how you plan to repay them. Next, have all of your financial documents in order. This includes tax returns, business bank statements, and other information lenders may request.
In addition, be prepared to explain any blemishes on your credit report. Lenders will want to know why these items are there and what you’ve done to improve your credit score since then.
More importantly, make sure that your business credit score is high enough to get approved even without collateral. This will also help you secure financing at more favorable terms and rates.
Don’t hesitate to talk to finance experts
If you think you’ve been denied a business loan for other reasons, make sure to talk to finance experts. They can help you determine why your loan application was rejected, and can guide you through the re-application process.
About the Author
Matthew Gillman is a business financing expert with more than a decade of experience in commercial lending. He is the founder and CEO of SMB Compass, a specialty finance company providing education and financing options for business owners.
The Editorial Team at Healthcare Business Today is made up of skilled healthcare writers and experts, led by our managing editor, Daniel Casciato, who has over 25 years of experience in healthcare writing. Since 1998, we have produced compelling and informative content for numerous publications, establishing ourselves as a trusted resource for health and wellness information. We offer readers access to fresh health, medicine, science, and technology developments and the latest in patient news, emphasizing how these developments affect our lives.