Small business owners seeking financing are often met with a tough reality check: Not everyone who applies for a small business loan gets approved. To give yourself a fighting chance, you’re going to want to dot your i’s and cross your t’s. This, of course, means giving attention to everything that could be a potential threat to your business loan application.
To help give you that fighting chance, we’ve compiled a list of the six not-so-obvious factors that could hurt your business loan application.
1. You have a tax lien on your business
If you don’t pay your business taxes on time, the IRS will come after you, sending you a Demand for Payment Notice. And if you’re unable to pay off your debt or can’t come up with a payment plan, the IRS can slap a tax lien on to your business’s property.
Not only will this lien give the IRS ownership of your office equipment, inventory, accounts receivable, stocks, and so on, but it will also make it more difficult for you to get the financial assistance you need and hurt your chances of your business loan application getting approved.
Once the debt is paid, it takes 30 days to be removed from your credit report. If you’re unable to pay the debt, working out a payment plan with the IRS is your next best solution.
2. You have a UCC lien on your business
Just like a tax lien, a Uniform Commercial Code (UCC) lien is filed to secure collateral and establish priority in case a debtor defaults on their loan. The difference between the two, however, is that a UCC lien doesn’t mean you’ve actually done anything wrong. In fact, it’s possible to have a UCC lien on your business without your knowledge.
Even if you haven’t defaulted on your loan, banks or lenders may file a UCC lien on your business, giving them the first rights to your property just in case you do slip up. It’s even possible to have a UCC lien on your business if you haven’t accepted a loan, simply because it’s part of the lender’s underwriting process.
You can check with your state’s Secretary of State office to find out if you do have a lien on your business because, if there is, lenders may deny your business loan application simply because your collateral is already tied up. This serves a good reminder to read the fine print of any loan you apply to!
If you do happen to have a UCC lien on your business, you’ll need to contact the lender responsible for filing the lien to have it removed.
3. Your landlord refuses to sign the landlord subordination agreement
It’s common for a commercial real estate lease form to give the landlord the rights to your collateral if you fail to pay your rent. Unfortunately for you, lenders aren’t interested in playing second fiddle when it comes to recovering their losses.
If you’re applying for an SBA loan, plan on having your landlord sign a Landlord Subordination Agreement or Landlord’s Waiver. If the landlord signs this agreement it gives the lender first rights to seize collateral if you fail to make your payments. Unfortunately, your landlord may not be so eager to sign, and if they don’t you may have to kiss that loan goodbye.
4. You’re in a risky industry
Each industry is tagged with either a Standard or North American Industrial Classification number, which classifies the function and risk of each industry. If you’re in an industry that’s classified as a higher risk, you could be flagged by the business credit agencies, making it more difficult to obtain any sort of financing.
5. You don’t have any business credit history
To determine whether or not you’re a good loan candidate, some lenders will look into your business credit history. Your business credit is scored on a scale of 0 to 100 and is based upon your company’s debt and repayment histories with lenders and suppliers, as well as any legal filings.
For brand new businesses who are looking for funds early, lack of general business history can be a huge deterrent for lenders. Even some of the most lenient lenders require you to have been in business for at least a year.
If your business is less than a year old, try building up a business credit score before you apply for a loan by applying for a credit card or leasing equipment as opposed to buying it.
6. Your bank statements don’t represent your revenue
If you’re applying for a short-term loan, lenders will ask to see your bank statements from the last three months. Just remember, if you’re a seasonal business, you don’t want to apply for a loan during your off season, as your statements would not accurately represent your yearly revenue.
To increase your chances of getting approved, only apply for a loan during your company’s busy season.
Boost your chances at securing a business loan
The application process for a small business loan can be time consuming and frustrating, but knowing what a lender is looking at will help you focus on the most important factors of your business loan application, and give you a better chance at success.
The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.