For a small business to grow into a big business, you need a loan unless you have exceptional sales and profit margins. A small business owner has plenty of places he can go with a loan application. Banks seem to be one of his options on most occasions. What these homeowners may not realize is that banks have recently developed a reputation for turning down small business loans. It seems that banks are more interested in financing large companies because of their benefits. A bank may present a variety of reasons for refusing approval of a small business loan. Some of the common reasons are as follows:
Reasons for banks to reject your small business loan
credit history
One of the barriers between you and a business loan is your credit history. When you go to a bank, they look at your personal and business credit reports. Some people are under the impression that their personal credit does not affect their business loans. But that is not always the case. Most banks analyze both types of loans. One of the aspects of credit that matters a lot to banks is credit history. The length of your credit history can negatively or positively affect your loan approval.
The more information banks have on hand to assess the creditworthiness of your business, the easier it will be for them to send you the loan. However, if your business is new and your credit history is short, banks will not be willing to send you the desired loan.
risky business
You must be aware of the term high risk business. In fact, lending institutions have created an entire industry for subprime companies to help them with loans, credit card payments, etc. A bank may consider many factors to assess your business as a high-risk business. Perhaps you are in an industry that is high risk per se. Examples of such businesses are companies that sell marijuana-based products, online gambling platforms and casinos, dating services, blockchain-based services, etc. It is imperative to understand that your business activities can also make it a high-risk business.
For example, your business may not be a high-risk business per se, but you may have received too many refunds on your shipped orders from your customers. In that case, the bank will see it as a risky investment and could eventually reject your loan application.
Cash Flow
As stated above, your credit history is very important when a bank must approve your loan application. While having a short credit history increases your chances of rejection, a long credit history isn’t always a savior. Any financial incident in your credit history that does not favor your business may force the bank to reject your application. One of the most important considerations is the cash flow of your business. When you have cash flow problems, you risk getting a “no” from the bank on your loan.
Your cash flow is a measure for the bank to know how easily you can repay the loan. If you’re short on cash flow, how will you manage repayments? However, cash flow is one of the controllable factors for you. Find ways to increase your income and reduce your expenses. Once you have the correct balance, you can approach the bank for a loan.
Debt
One mistake small business owners often make is trying too many places to get loans. They will avoid going to the bank first, but in the meantime they will get loans from various other sources. Once you’ve gotten your business financed from other sources, it makes sense to pay it back on time. Going to the bank when you already have a lot of debt to pay is not recommended. Keep in mind that the debt you or your business has also affects your credit score. In short, the bank does not even have to investigate to know your debt. An overview of your credit report can tell the story.
The preparation
Sometimes your business is doing well and your credit score is in good shape too. What is missing, however, is a solid business plan and proper preparation for loan approval. If you haven’t figured it out yet, banks require you to submit a large number of documents with your loan approval application. These are just some of the documents you will need to present to the bank to get your loan approved.
- Income tax return
- Existing loan documents
- personal financial documents
- Memberships and ownership
- Commercial lease documents
- company financial statements
You have to be exceptionally careful when presenting these documents and presenting them to the bank. Any discrepancies may result in loan rejection.
Customer Concentration
This may surprise some, but many banks take this aspect of their business seriously. You should not forget that loans are investments of banks. Businesses that approach banks are their vehicles to multiply your money in the form of interest. If the bank finds that your business does not have the potential to expand, it may reject your loan application. Think of a mom and pop store in a small town with a small population. If it only serves the people of that city and has no potential to grow further, rejection is imminent.
In this particular case, even if the business has hefty profit margins, it relies on its regular customers for that. The bank could see it as a returnable loan but not as an investment opportunity.
conclusion
The good news is that you have many financing options as a small business owner. Banks today are just one of many options for financing your bank. You don’t necessarily have to apply for loans when you have crowdfunding platforms actively helping small businesses with their financing needs. If you’re looking for a business loan from a bank, that’s fine. However, if the bank doesn’t approve your application, you shouldn’t be too concerned.