It’s a common scenario. Franchisees think of a great idea to grow their business. So they approach the bank for a loan. But then they get rejected.
As both a small business owner and a credit expert, this is a scenario I understand intimately. So believe me when I tell you: it doesn’t have to be this way.
That’s not to say there’s a magic solution. There never is – especially in the current environment, in which banks have introduced the tightest lending standards in many years.
But if you take a moment to understand the problem, you’ll see where to find the solution.
What you do outside business hours matters
A common reason business loan applications get rejected is because of the franchisee’s personal credit position.
You might assume you’re fine because your business has solid cash flow and growing revenues. But if the bank asks for a first-party guarantee, your personal finances will go under the microscope. And the bank might not like what it sees.
Here are some personal actions that might affect your business loan application:
- Forgetting to pay phone, internet or electricity bill
- Falling behind on your credit card payments
- Making regular ATM withdrawals from a gambling venue
- Applying for multiple loans in a short period of time
- Defaulting on a loan
‘What does any of that have to do with my business loan?’ you might wonder.
Well, if the bank thinks you’re the sort of person who struggles to manage credit, they might not want to give you any. Or if the bank thinks you have a gambling problem, they might conclude you’re too much of a risk.
You need to see what the banks are going to see
That’s why you should order a copy of your credit report from Equifax, Experian or Illion (Australians are entitled to one free report per year).
When? Today would be a good time. But if not today, at least six months before you want to apply for a business loan.
Banks will look at your credit report while assessing your loan application, so this will allow you to see whatever they’ll see.
Check for inaccurate information (such as false reports of missed loan repayments). Inaccurate information can be removed; you can either do it yourself or outsource the tricky task to a credit repair agency like Princeville Credit Advocates.
Unfortunately, accurate information can’t be removed. But it’s still good to know of any negative listings because then you can work on ways to offset them by increasing your credit score.
The more you improve your personal credit position, the greater your chances of getting a business loan.
About Dr Merrilyn Mansfield
Dr Merrilyn Mansfield is the lead adjudicator and researcher for Princeville Credit Advocates. She is fascinated with the consumer laws that relate to credit reporting and in advocating for a consumer’s right to a correct credit report.