Tips for Overcoming Seven Common Objections to Your Commercial Loan Application
Applying for a commercial loan can be tricky. If you’re a business owner, however, that shouldn’t discourage you from seeking the loan you need. If you’re considering applying for a commercial loan, increase your chances of having your application approved by avoiding some typical obstacles. Most issues business owners face can be corrected with organization, planning, and awareness. Here we identify several common application objections and offer tips on how to overcome them.
1. Document Your Income
Failure to provide income documentation is one of the most common reasons for commercial loan applications to be rejected. This is because many business owners struggle to track their financial progress effectively. Throughout the application process, a commercial lender may ask for financial records that not only include sales, income, and tax figures, but they may also go a step further and ask for things like franchise agreements, business licenses and registrations, and may even request personal bank statements and credit reports. In many cases, they’ll want to see years’ worth of documentation. Even if you don’t have a complete and comprehensive record of everything a lender requests, you can still follow these steps to supplement your application.
- Provide what you have: Collect, sort, and organize all relevant and available documentation.
- Demonstrate future projections: Provide multi-year growth projections that show the potential benefit this loan could have for your business.
- Explain a pay-back plan: Draft a plan that shows how you will spend the funds from the loan and how you plan to pay it back according to the anticipated terms.
- Share your competitive advantage: Clearly state what it is that makes your customers choose your business over that of your competitors.
2. Create a Business Plan
Developing a business plan is another common struggle for business owners. Lenders want to see the plan that guides your company and the forethought that went into creating it. If you don’t have a solid plan, your business will be more susceptible to unsuspected challenges and less able to adapt in times of adversity. If you don’t already have a business plan, these tips can help you create one:
- Start with a summary: Create a thorough explanation of your business, products, services, relevant financial information, and market, then trim it down to a comprehensive executive summary.
- Explain why you need funds: Businesses almost always need access to cash to operate smoothly, so explain how your planned purchases will help your business. This will be especially important if you are applying for an SBA loan.
- Include future projections: As mentioned above, multi-year growth projections help prospective lenders develop perspective on your business by understanding what sort of revenue you believe you can generate.
3. Stabilize Your Cash Flow
Lenders will want to know about any cash you have on hand because they want to gauge your business's health. For example, a business that’s ready to take a big step forward may have no trouble generating operating capital, but may not have quite enough money to make a significant investment. Things like moving into a larger space, investing in better equipment, or taking on additional staff may be hard to take on. By showing a lender that you have a stable, well-documented cash flow, you are demonstrating that your business can use what it has responsibly, and that will make you a much more attractive prospective borrower.
Pro-Tip: Create quarterly reports for at least a two-year period. If your business hasn’t been operating that long, create quarterly reports for the lifespan of the company. By showing your performance at regular intervals throughout a given period, you display consistency and, if things are going well, growth.
4. Focus on Your Business Credit Profile
In addition to financial statements and projections, lenders will also want to know about the business's credit history. Building a business credit profile can take time, but it’s something that business owners can begin establishing at any point. Even without an established credit profile for your business, your personal credit history may be enough to demonstrate good faith if the rest of your application is strong. If you are working on improving your business’s credit profile, here are a few things you can do:
- Incorporate your business: A certificate of incorporation separates your business from your personal identity so that it can begin building credit of its own.
- Open trade accounts with vendors: If you work directly with any vendors or suppliers, having them create an account in your business’s name can help you develop a payment history.
- Take out a small revolving loan: Taking out a revolving loan and using it responsibly will allow you to not only build a business credit profile, but also gives you quick access to cash for your business. Unlike signature loans or SBA loans, qualifying for a revolving loan is usually easy enough that most relatively new businesses can be approved without an extensive credit profile.
Pro-Tip: Once you incorporate your business, you should apply for either an employer identification number (EIN) or tax ID number (TIN). Once you receive this unique identifier, open a business checking account with the financial institution where you plan to apply for your commercial loan. Since many of them take a more community-minded focus, you may find a greater benefit by working with a local full-service credit union instead of a big-name bank.
5. Improve Your Personal Credit Score
Even if you have built a strong reputation for your business, many lenders will still consider your personal finances as well when determining whether to lend. One of the best ways to eliminate potential concerns is by making a concerted effort to pay off personal debts.
Pro-Tip: One of the most effective ways to pay down revolving debts, such as credit cards, is to take out a low-rate personal loan to consolidate debts, which can reduce your monthly interest payments so you can put more toward the outstanding principle.
6. Offer Collateral if You Can
If your loan application is not quite where it needs to be, a lender may ask you to put up collateral against your loan. This can include business assets such as vehicles, equipment, or bank accounts that are registered in your business’s name. Some lenders offer different types of loans, such as equipment loans or inventory loans, designed to establish collateral for your business, but these can be a little risky. If your existing business credit profile and personal credit history aren’t quite enough to get the loan your business needs, try taking out a small revolving loan and double down on building your credit as quickly as possible.
7. Set Money Aside for Closing Costs
Depending on your loan type, there may be closing and/or packaging costs due when your loan is finalized. This is pretty common, especially if you’re applying for an SBA or commercial real estate loan. These costs can range as high as 10% depending on factors like your loan amount, repayment terms, and credit score, so it’s a good idea to set money aside before you apply.
Pro-Tip: Even if you’re in the early stages of thinking about your loan, it’s a good idea to call potential lenders and ask for a ballpark figure of what you might expect in terms of fees. As long as you know what type of loan you want and have an idea how much you’d like to borrow, they should be able to help you determine how much you’ll need to save.
Ready to Get Started?
If being cash-strapped is keeping your business from reaching its full potential, a commercial loan may be exactly what you need to get over the hump. At First Service, we are a community-chartered credit union, so we understand the importance of supporting the small and growing businesses in our area. Let our team of professionals work with you to take your business to the next level. Call our commercial services team to talk about getting a business loan today!