No one likes rejection. Especially when it comes in the form of loan denials for your future food truck empire. Educating yourself about why businesses do or do not receive financing is the first step to taking control of your own destiny.
Today we’ll discuss why both prospective and current food truck vendors are turned down for small business loans?
7 Common Reasons For Food Truck Loan Denials
Here are seven common reasons your food truck business might have received loan denials.
- Not Enough Time In Business. Young businesses don’t make the cut for many types of business loans. Lenders like to see that your food truck has a history of on-time payments and financial success. Startup food trucks are still working on proof of concept, so if your company with less than a year or two in business are a riskier bet for lenders.
- No Collateral. Some online financing options will accept personal guarantees as collateral for your food truck loan. The problem is that many of the more flexible, larger loans with great terms require collateral in the form of your business assets. This might be your truck, kitchen equipment, or maybe even inventory.
- Your Personal Credit Score Is Too Low. Personal credit plays a huge role in your ability to qualify for a business loan. If you think of this from a lender’s perspective, your payment history is a good indicator of how responsible your business will be with payments.
- Bad Credit Score. Your personal credit score does factor into a small business loan, even if your company has been in business for a while. If you can’t manage your personal credit, the logic goes, how reliable will you be when it comes to paying back a business loan? If a poor credit score is the reason you are turned down, review your score and take steps to repair it.
- You Can’t Cover Your Debts. Lenders want to know that you can cover your current debts. To do this, they may calculate what’s called a debt-service coverage ratio. A lender might use, for example, a DSCR of 1.25 to qualify businesses for a loan. A DSCR of 1.25 would mean that, if you have a current debt obligation of $1,000, you’d need $1,250 in free cash to qualify for the loan. A DSCR of less than one indicates that your business has less free cash flow than its current amount of debt.
- Inadequate Cash Flow. Cash flow is one of the first things lenders look at when deciding whether to approve a food truck loan. They want to know that you have enough cash flow to not only cover your business expenses, but also pay back the loan and still have a little left over. If your cash flow is bad or you regularly experience seasonal slow times, that’s a red flag. Poor cash flow is a major cause of business failure, so if this is why your loan was rejected.
- Incomplete application, paperwork. One of the most common reasons food truck loan denials is that the applicant didn’t complete the application correctly or didn’t provide all the necessary backup information. Among the supporting documents most banks will ask for are a business plan, three to five years of business and personal tax returns, business bank account statements, financial statement/projections for the business, and your personal and business credit reports. The fix for this problem is easy. Get your paperwork in order before applying again.
What To Do If Receive Loan Denials
You were counting on getting that food truck loan, but the bank said no. What do you do next? Your first step should always be to find out the reason for the denial. Some bankers will be more specific while others won’t share details, but by law, banks must mail you a notice explaining the reasons why your food truck loan application was denied.
If you need a cash infusion for your food truck, there are options available that can cover you while you work on improving the factors needed to secure financing. Be aware: Some of these options carry higher interest rates than their counterparts. However, they’re useful as a stop-gap measure until you can get approved for the food truck loan you want.
If business age or credit is your problem but your personal credit is sound, consider business credit cards. Business credit cards allow you to make purchases on credit while building your business credit. Short-term online loans, invoice financing and equipment financing often have less stringent requirements than longer-term loans or traditional bank loans.
The Bottom Line
Things are looking bright for food truck owners. Rising employment is resulting in increased consumer spending. This good news is increasing business optimism, and owners of food trucks nationwide are making capital investments in their operations. However, access to capital is still a concern for many prospective and current food trucks, even with the increased lending by banks. Business owners who get turned down when applying for bank loans don’t always know why. We hope this article helped you understand the most common reasons for food truck loan denials.