It seems banks want to know everything about you. You have to send them business plans, projections, profit and loss statements, and the guest list to your 12th birthday party. But many lenders aren’t very good at sharing information with you. They’ll send you the denial, but they aren’t very forthcoming about why your small business loan was denied.Frustrating.
Like most beauty salons and spas, you have a lot of productive ways to put some extra cash to work. Maybe you want some working capital to bring on a couple new stylists and maximize your space. Maybe you want to invest in some equipment so you can start offering a range of new, high demand, high value services. Maybe you just need to get a business loan with bad terms off your sheet and reduce the dent it’s making on your cash flow.
Like I said, there are great reasons why your beauty salon wants a small business loan. If you’ve been denied for a small business loan, and you’re not sure why – it’s time to take a hard look at what’s going to see if you can identify for yourself the change to make to access cash for your salon. Here are some common reasons small business loans are denied and ways to fix them.
Bad Credit, not yours – your business’s credit: We talk so much about how important a small business owner’s personal credit is when looking for a business loan, it’s easy to overlook the fact that your business has its own credit rating too.
In fact, a recent survey of small business owners found that 72% of them don’t know what their business’s credit score is. Some may not even know their business has a credit score. Well, a number of organizations rate business credit, and they all use their own ranking. They may not even be looking at the same information. It’s a challenge.
What to do: Check some of the business credit bureaus, like Experian and Dun & Bradstreet and find out your business’s credit score. If it’s low, look into where you can improve it. Make sure all the accounts and bills under your business’s name are there and pay them on time. If you have suppliers that you pay regularly (and on time), make sure they’re reporting your timely payments to bureaus. Raising a business credit score can take some time. If you have some outstanding debts dragging it down, you may want to consider taking a bad business loan to clear them up and start building a solid payment history on the new business loan.
You Have Tight Cash Flow: If lenders can’t see enough cash flow through your business each month to make payments, they’re not going to be eager to throw money your way.
What to do: You can follow some best practices to improve your cash flow, and then re-apply once you have some breathing room. If you need some cash now, salons are excellent candidates for merchant cash advances since they typically have a consistently high volume in credit card sales. Tight cash flow isn’t a bar to an MCA because the MCA is repaid from future credit card sales. Keep in mind, the MCA won’t help your cash flow problem, so look into ways to ease that squeeze regardless.
Your Business Loan Application is Under-Capitalized or Under-Secured: Lenders want to see assets so they know they have recourse in case you can’t repay the business loan. It’s easy for small business owners to leave relevant assets off a business loan application, giving the appearance that they’re business is under-capitalized. Or, they may offer up collateral as security that isn’t as valuable as they think. The main physical assets a salon might have to secure a business are loan are inventory and equipment. In many instances, the beauty salon won’t have sufficient inventory to secure the amount sought. As for spa equipment, that’s a depreciating asset. The longer the life the business loan, the less valuable your equipment gets.
What to do: If you have some good business assets that you haven’t been including on your business loan applications – for example in the form of retained earnings or owner’s equity – you may want to consider adding them. Another option is looking for an unsecured business loan instead, so capitalization and collateral becomes less of an issue.
You’re Unsure How You’ll Use the Money: Lenders, especially banks, want to know how you plan to use the money. That’s why they ask for business plan and projections. In some cases, applicants just can’t quantify how they’ll use the money; they just need some working capital to cover operational costs. In other cases, you may think your business plan and projections on how you’ll use the money to expand into the space next door is clear. Perhaps. The bank might think your projections are unrealistic or your business plan as to how you’ll find a stream of new clients to provide a return on the expansion is too vague.
What to do: If you are providing a business plan and projections, get some valuable, outside review of your documents. Someone who can see the strengths and flaws, and won’t be shy about telling you. If you are looking for working capital, you can get loans without having to specify how you’ll use the funds from many alternate funding sources.
Your Financial Paperwork is a Mess: Your bank statements, profit and loss statements, credit card statements – any sort of financial statement. The point is, they’re a mess or insufficient. This is bad not just because of what information is lacking, but because of the message it’s sending. Namely, that you’re not a small business owner on top of your details. Remember, lenders aren’t just lending to a business, they’re lending to a person. You. They want to have confidence in you.
What to do: Get your paperwork in order before submitting another application. Many loan programs offered through alternative financing lenders require less paperwork than traditional banks, so your preparation for them may be easier.
Whatever the reason your beauty salon has been denied a small business loan in the past, ask yourself some hard questions to find out what the reason could have been. Start with these potential reasons. Once you know where the problem is, you can start resolving it and finding the lending program that suits your business.