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What should you do if the lender rejects your application?

Has your loan application been declined? Have you made an entire business plan around this short-term mortgage, and the answer is, “Sorry, not this time!” Do not worry; sit back and relax. You are not alone in this situation, and many applicants face rejection of loan applications. If your application is rejected, keep pursuing your goals. Figure out the problem before applying for alternative funding.

1. Understand why the lender rejected your application

The first step is to find out why this application was unsuccessful. Unfortunately, the lender rejected your loan application, but it is important to look into the details and make sure your assumptions are correct. That way, whenever that happens, your next application may have a better chance of success. Applying for a loan too often can result in all applications getting rejected and hurting your credit score.

Here are some reasons why lenders decline 1st mortgage or business loan applications:

  • Low credit score

Bad credit will adversely affect your application for a business loan. The lending institute will immediately decline the loan application. A credit score is a number that you must maintain to avail of business loans at low-interest rates. Checking your credit score and obtaining a credit report is mandatory for traditional lending options, however private lenders do not have this criteria.

  • Incomplete application or documents

In addition to the loan application, the applicant must submit loan documents specified by the lender. You must submit all requested documents with the necessary details to complete your application. You should not submit incomplete, lost, false, forged, or counterfeit documents to any financial institution. It can lead to rejection.

  • Lack of effective business planning

Every borrower should be aware of the type of business loan for which they are applying. To be successful, you should prepare a specific, self-designed business plan and present it properly during your loan application. Traditional Banks hesitate to lend to business owners and entrepreneurs without a business plan and adequate business information. Whilst banks have this criteria again private lenders have much less requirements.

  • Inadequate cash flow or collateral

A company’s cash flow is the primary source of information lenders use to assess the ability to repay the loan. Insufficient cash flow can cause banks to lose confidence in you, leading to 2nd mortgage loan declines. Maintain proper cash flow by arranging bills and eliminating extra charges.

Second, not all banks offer unsecured loans. For startups, business owners, and corporations wishing to apply for secured business loans or secured loans, it is mandatory to provide sufficient collateral required to get the loan amount. Again, insufficient collateral by the applicant will result in the refusal of the loan. You can submit collateral, including residential or commercial real estate.

  • Credit Beginner Startups or Applicants

A “New Credit” is a customer with no current or previous credit use and does not have or maintain a credit score. These clients who want to start their businesses need help getting loan approvals or having a loan declined, as banks classify them as high-risk applicants. Therefore, a “credit newbie” or startup applicant who is not very familiar with the banking industry should first start using basic credit products such as credit cards. When using a credit card, the Customer should not maintain a high credit utilization rate above 30% of the total approved limit. After building a satisfactory credit score, a traditional bank may then look at an application, however private lenders are also an alternative for a short-term mortgage.

2. Remove errors and negative comments from your credit report

After identifying the reason for rejecting the 1st mortgage application, check your credit report. Report copies are available free of charge from all three credit bureaus. Negative grades can affect your creditworthiness. When reviewing your credit report, ensure each account listed is yours and is accurate.

You can appeal any inaccuracies in your credit report to one of the three credit bureaus. You can pay any credit repair company to pinpoint the bad points or do it yourself. You are free to object to any incomplete or inaccurate information.

3. Other important eligibility improvements

In addition to removing errors and negative comments from your credit report, a borrower should consider improving the following key factors to improve your loan application.

  • Credit score

Poor credit may result in the rejection of your 2nd mortgage application. Traditional lenders use this score to assess their risk as borrowers. Different lenders consider varied scores to be good, average, or bad. To know the perfect credit scores, you must see the eligibility criteria of respective lenders. Some tips to improve credit score are paying back on time, limiting the use of credit cards, and paying all the utility bills timely.

  • Debt to income ratio

Lenders can also reject 1st mortgage applications if the DTI ratio is too high. Look at this number to gauge your ability to repay your new loan while managing your current debt. Lenders generally prefer a ratio of 36% or less. However, in some cases, they may consider applications with up to a percentage of 50%.

To calculate your DTI, the lender divides the current monthly debt burden by your monthly income. For example, if your current monthly debt is $3,000, your gross income is $4,000, and your DTI ratio is 75% ($3,000 / $4,000).

  • Increase Earning

Increasing your income is easier than doing it, but it can help you earn more credibility. The higher your income, the lower your DTI ratio may be. You will likely meet the lender’s minimum DTI requirements. To increase your income, consider starting a lucrative side business or mastering a popular skill to increase your earning potential.

End Verdict

Feel free to ask the lender to explain why they have declined the short-term mortgage application. Before applying for another loan, double-check your credit report to ensure everything runs smoothly. See if your credit score has improved. To increase your chances of approval, you should wait until you meet the lender’s requirements or choose another lender better suited to your financial situation. Always remember that although traditional lenders have arduous criteria to meet private lenders have a much more relaxed approach to business lending.

How Does A Small Business Loan Operate?

Small businesses often miss out on market opportunities because of a cash flow issues. But this should not stop you from looking for growth. Business owners can look for financial institutes such as banks or non-banking lenders for access to money.

You can use 2nd mortgages to hire new employees, renovate, inventory, stock, launch a new product, or expand your business. Businesses are in constant need of funds. So, as long as you use the borrowed money for your business growth or any worthwhile business purposes lenders are happy to assist. Most businesses at some time will borrow funds to fix the gaps in their cash flow.

How Does A Small Business Loan Operate?

Loans are given to business owners who need quick access to funds to meet their immediate business expenses. There are different types of business loans, one to meet everyone’s requirements. If you are new to the industry and have a poor credit score, you can seek a small business loan with bad credit.

The financial market has many banking and non-banking lenders for you to choose from. Visit their official website and check their eligibility criteria. Make a list of all the financial institutes whose criteria are easy for you to meet. Thus, prepare a list of documents required by a lender. Compare and consider the terms such as interest rate, repayment term, and application charges. Apply to the most suitable financial institution. If you fulfil the eligibility criteria and provide all the documents, you will get the funds in your bank account. The approval time will depend on the type of loan you select to go with.

There are several types of business loans available in the market. You will have to choose one according to your purpose and the financial conditions of the business. To access a loan, you will have to meet the eligibility criteria. It remains mostly the same, with a few variations according to the lender and chosen loan type. The requirements that are common across all financial products are as follows.

  • Credit Score

A credit score is a number that indicates the financial health of a business. The credit report is a must-check by all lenders, however some are not concerned by any payment defaults.

  • Operational Time of Business

Lenders want to invest in businesses that have been operational for at least six months. They see new businesses as a risk, but again there are lenders who can assist if you have a start up business.

  • Records of The Business Finances

These include balance sheets, cash flow statements, a business plan, and profit & loss statements.

  • Business And Personal Credit Score

If your business includes credit history, creditors will check your credit management capability. If there is no credit history of your company, the financial lenders will review the personal credit history of the business owner. This is because they will require a personal guarantee for repaying the funding even if the company defaults.

What Are The Various Different Types of Small Business Loans?

The different small business loan types available in the market are:

  • Business Asset Finance

It is also popularly known as equipment financing. You can finance a business asset or equipment using borrowed money. Here, the financed asset is the collateral. The borrower has to repay in the form of monthly instalments. These are a good option for new business owners who need equipment to run their business. Also, the interest rate and other loan terms are favourable as the lender is at a reduced risk.

  • Secured Business Loan

A secured business loan requires an asset to submit as security. It is a good option as a small business loan with bad credit. Borrowers can use property or vehicles as collateral. The applicant has to repay within a fixed instalment term. The loan amount is usually approved based on the value of the collateral. Business owners get attracted by this form of loan due to lower interest rates, which is indeed a plus point. It is a perfect choice when you need funds for a large purchase or business opportunity.

  • Unsecured Business Loan

Unsecured business loans do not require collateral and are a popular choice amongst business owners. There is no need to offer any asset as security against the loan. Factors that lenders look for quick approval include a healthy cash flow, a solid financial history, and a good credit score. These are short-term loans, the terms varying from 3 months to 3 years. Based on the annual turnover of your business, you can get a sum ranging from 5000 to 500K AUD.

  • Invoice Financing

It is a secured loan where you can submit the accounts receivable as collateral. You can use invoice financing as business asset finance, buying inventory, or paying your staff. The loan amount is approved mainly based on the cash flow of your business. Once you receive the pending invoices, repay the debt. The loan amount will be lesser than the value of the invoices. New business owners can also apply if they have sufficient invoices to use.

  • Business Line of Credit

It is a form of financing where you use the funds instead of getting a sum of money altogether. It is a strategic tool that gives businesses access to money to meet short-term requirements. The enormous advantage of this small business loan with bad credit is that interest is charged only on the sum used, not the entire lump sum amount.

Final Thoughts

The first step to seeking a business loan is doing your research and finding an appropriate lender. If you get stuck anywhere, take help from financial advisors. We recommend not applying with several lenders simultaneously, as multiple rejections can negatively affect your credit report. All business loan types, such as secured, unsecured, and business asset finance, have similar working with slight variations.

Can Short-Term Mortgages Be Advantageous For Business Owners In New Zealand?

Everyone, whether a company or an individual sole trader may face financial crunches from time to time. Short-term mortgages where a business owner borrows money for one to twelve months can be an enormous relief in such a time. A business can borrow money during low season sales, to cover daily expenses, expansion, and more. A sole trader may need a loan to cover unexpected expenses. Whatever the reason, a loan for a short term offers several benefits.

Advantages of short-term mortgages for business owners in New Zealand

Let us now check out the various benefits of short-term mortgages for business owners in NZ.

1. Short-term loans get approved quickly.

One significant characteristic of short-term loans is quick approval. In comparison to traditional loans, these get approved within 1 business hour. You do not have to pass through an extended application process for approval. So businesses can rely on short-term loan lenders to meet unforeseen expenses by getting funding in 24 hours.

2. Simple application process

Getting a traditional loan from a bank or a financial institute is tough. A start-up business and individuals having poor credit scores will not qualify for a long-term loan. In such cases, a short-term business loan is a lifesaver. Due to the low-risk factors, lenders agree to lend to people even with a bad credit score.

3. Competitive interest rates and less interest to pay

The duration of short-term loans varies from one month to one year. The loan amounts are normally less than long term mortgages. Therefore, the interest you pay over the term is a lot less. Long-term loans involve borrowing large sums of money for a period of 10 to 30 years. In a short-term loan, you will surely end up paying less interest than in any other form of financing, as the term is months not years. Although interest rates may seem higher, you only have to pay it for no more than a year. This way, you will save money in the long run. Paying less interest means saving money. You will save thousands of dollars if you opt for a short-term loan rather than a 30 to 15 years loan.

4. Short-term loans on mortgages offer low-interest costs

Short-term business loans usually have higher interest rates. But in the case of a first and second mortgage, low-interest rates are generally offered for a short period. So along with paying for a shorter duration, you can also pay a lower interest rate. T

5. Short-term business loans are handy

Short-term business loans are a lifesaver in liquidity problems during an emergency. Small businesses and start-ups cannot generate revenue and sometimes need assistance with cash flow. Cash flow and capital are everything for them. They need money for everyday expenses and business expansion and growth. Imagine a scenario when you are in an emergency and need to purchase a piece of equipment for your company. Investing in that equipment will reduce the available funds from your working capital, and not buying it will mean lagging behind the competition. Securing a short-term business loan is your way out of many similar situations.

6. These loans can help in improving your credit score

You can boost your credit ranking by obtaining a short-term loan. The credit score algorithm favors such loans. New businesses do not have a credit history. No one wants to lend to a startup, and you may find yourself in a dilemma of where to begin from. Short-term loan lenders are ready to lend you money but at a higher interest rate than traditional ones. These loans are the best way to start building your credit score until you become eligible for funding approval from a bank or a financial institute. You can later borrow on low-interest rates once your credit score has improved.

7. Predictability of financial situation

The duration of a short-term business loan is a year or less. You can get an idea about the financial situation of your company in the next 6 to 12 months. Determine the best repayment term with your current income and expenditure.

9. Your business is stress-free

You do not have to worry about interest and principal payments. Borrow money for a short duration, pay it off and borrow again when you need it. These loans generally impose less burden on your business.

Final Thoughts

Short-term business loans are known for higher interest rates. However, when applying for a second or 1st mortgage, you can get them at a competitive interest rate. It is a convenient form of finance for businesses to meet unexpected expenses.

Privately Funded Commercial Business Loans Explained

Traditional bank lending institutions have created a void in the market for small business loans. Conventional lenders frequently have tight lending requirements and little to no flexibility in their underwriting and business loan structure. Considering your good track record of loan repayments and positive financial projections, traditional lenders are still hesitant to lend to businesses amid the recent recession. Perhaps you have previously been denied conventional bank funding for your small company needs but that does not imply you do not have other alternatives.

Private loans are accessible to those who do not qualify for traditional bank funding. These loans are often secured by private mortgages. Private lenders can give small businesses new types of business financing that may work for practically any enterprise that can establish its ability to repay the loan and does not pose a major risk to the lender since there are fewer restrictions and limits.

Here are several advantages to obtaining a privately funded commercial business loan:

  • The most essential advantage is generally simply having access to cash. Most small company applicants receive just a 20 to 40 percent acceptance rate from banks. On the other hand, depending on the business’s condition and financial condition, private business lenders can have approval rates as high as 90 percent.
  • With commercial business loans being privately funded, you can qualify in less than 24 hours and be approved in a few days.
  • In terms of conditions, payback, and innovative payment scheduling, commercial loans are frequently conventional. Private loans typically provide more flexibility to meet the demands of seasonal enterprises, as well as to overcome roadblocks and other typical loan-related difficulties. The qualification requirements are more flexible as well, but the interest rate is greater.
  • Investors with poor credit, low income, or those searching for inventive financing conditions when making investments might benefit from private financing.
  • Most of the private financing is only short-term. When you are, for example, getting a private mortgage, you will not be any closer to paying off your debt after your mortgage term expires if you simply pay the interest on this sort of loan, therefore it is not a good long-term alternative.

Commercial business loans are given to a range of business organizations to help with short-term financial needs such as operational expenditures or the acquisition of equipment to help in the process. Commercial loans are a type of finance provided by private lenders to investors that want quick funding. The loan may be extended in some cases to assist the business with more fundamental operating needs, such as payroll finance or the purchase of goods required in production. Hence, private finance may be right for you if you are seeking to buy your next investment property or equipment and require financing that focuses on the asset.

When a private financial institution considers making a commercial loan, the credibility and character of the applicant take center stage, as it does for almost every form of a loan. In most circumstances, the business requesting the loan will be asked to provide evidence (usually in the form of balance sheets and other similar papers) demonstrating that it has a positive and stable cash flow. This ensures the lender that the loan can and will be repaid following the conditions of the loan.

But with private financing, there are also a few disadvantages:

  • The downside of private business finance is that you will almost always pay greater interest rates than you would with traditional finance. The bigger the danger of your small business defaults on the loan, the greater the interest rate the lender will demand.
  • Additional expenses, such as lender costs, broker costs, and legal costs, are common with private business loans.
  • Private lenders are also not regulated. Therefore, every transaction must be well-versed and documented. Making sure that you have already consulted a local attorney.

These loans frequently demand a business to secure collateral, which is often in the form of property or equipment that the lender can seize if the borrower defaults, files for bankruptcy, or worse, die. Even though it is privately funded, if you do not pay back the loan, the business leader has the authority to confiscate the collateral as payment since it is a secured business loan.

Also, since this is financed by the private source of funds rather than a typical mortgage lender, such as friends, family, or a company, make sure you have a mortgage deed in place to secure the loan. You can even use two mortgages to help finance your business. This will help you increase your loan amounts, lower your interest rates, and you might be able to have tax benefits.

You can get your 1st mortgage that is for the majority of funds that are needed in securing your finance for your investment. The 1st mortgage is the loan that was taken out when a property was purchased. In the case of default, the loan has precedence above all other liens or claims on the property since it is the principal loan that pays for the property.

While the original and 1st mortgages are still in place, you might take out another mortgage, such as a 2nd mortgage. Many people do not believe that getting a 2nd mortgage is beneficial. They would, however, be incorrect. 2nd mortgages have several advantages because when you take out a 2nd mortgage, you have more credit available than you would with a typical personal loan. The 2nd mortgage is a loan secured by your equity that you may use to pay for other projects and expenses.

A privately financed business loan could be right for you if you are an established small business owner with a good business strategy who wants to expand. It’s essential to have a business strategy in place so that you can return your loan properly. Seek financial advice if required and weigh the benefits and drawbacks carefully. Although taking out a secured loan from a private lender has advantages, there will always be risks.

HomeSec Business Loans New Zealand

152 Fanshawe St,
Auckland, 1010, New Zealand
​09 888 6550
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Monday to Friday (excl Public Holidays)
​ HomeSec Business Finance Limited
NZBN: 9429047936010