Business funding is a robust term that includes many types of finance vehicles to provide capital to your business. They will often times take the form of secured, collateral based loans and lines of credit, unsecured cash flow based lines of credit, subordinated, second position hybrid debt loans, distressed business loans and even the ‘non-loan’ loans, cash advances. Thus, lots of options are available for a business, depending on where it is in its lifecycle. However, many businesses are not getting approved and are left without capital options. Let’s look at the more common reasons a business loan is not approved.
Accurate application. Many times, a borrower will feel embarrassed or ashamed of a financial question asked on the typical business loan application. It is very important to fully disclose all the facts and circumstances about yourself and business to i) comply with the legal requirements of the application that you are signing, and ii) give the full, unobstructed picture of your situation. It will only waste time for you and delay any loan approvals.
Complete documentation provided. It never ceases to surprise me the number of borrowers that are quick to complete an application, but hesitant to provide the required documentation. This may be in the form of bank statements, income tax returns or financial statements. It is good policy and helps show that you are a responsible borrower. If you are having trouble accessing requested financial documents, you may need to look inside your business and address any problems. Remember, if you can’t measure something you can’t manage it!
Cash flow inconsistency. Cash is always king. It is the lifeblood of the business and should be managed very closely. If cash is inconsistent, be it for seasonality or poor working capital management, it makes it difficult for a debt investor to get comfort around a scheduled payback. If not already being done, a working cash flow forecast model should be used as a key tool to ensure the current and future health of the business. If you aren’t using one, I encourage you to put your cash inflows and outflows on paper, as it might surprise you.
Past judgments, defaults, or bankruptcy. Sometimes things go south and result in a loan default, legal judgment or even bankruptcy. These scenarios are not deal killers, but as indicated earlier, need to be disclosed immediately and with all the required documentation. Often times, loan underwriting allows for defaults and judgments if they are cured and on a restructured payment plan; and bankruptcy if the exit and case closure is at least one year past. It is encouraged to discuss this upfront and with complete transparency. Certain investors will provide loans while a business is in bankruptcy, which is referred to as debtor in possession financing.
Existing capital structure. How a business is capitalized (the use of debt and equity) can have a big impact on current and future financing. If a business has large amounts of debt stacked up, the chance of obtaining another loan will most likely not be available. It is an indicator that not enough cash may not exist to pay off the new loan payments and places the new lender last in line. If this is the scenario, the business should take a hard look at its balance sheet and determine if any restructuring, consolidation, or business plan modification is needed.
Industry. It is my experience that all industries can obtain debt capital, as long as you can prove you have a viable business. Many lenders limit the industry that they will invest in, thus it imperative that you go to the correct funding source, which in some situations will be private investor capital. Private capital is available broadly and focuses on different markets and industries.
If your business has been declined and you do not know what to do next, find yourself stacked up with loads of existing loans, or just want to understand more about the specifics of loan underwriting, please give me a call at 1-833-226-4288 or email me at anthony@csacapitalLA.com , as we can take a look at your business, capital structure and financial information and provide advisory feedback and possibly multiple funding options for new capital.