Why Small Business Loans Do not Get Approved
- Author Micheal Oladejo
- Published October 17, 2022
- Word count 1,242
Small business loans are often denied for a variety of reasons. Traditional lenders have historically used more stringent decision factors and lending credit restrictions to mitigate risk. The Federal Reserve Banks of New York, Atlanta, Cleveland, and Philadelphia performed a survey. It found that only 50% of small businesses that requested funding in the first half of 2014 received any money.
The easiest method to prevent a small company loan from being denied is to be aware of the traits lenders frequently see as red flags. Undoubtedly, some banks will be more detailed than other. In general, banks are obligated by law to mail you a notification outlining the reasons why your loan application was rejected.
Here are the primary reasons why small business loans are turned down and what your company can do to avoid these drops.
Low Credit Score for small business loans
One of the most common reasons a business loan is rejected is that the company’s credit rating is lower than the lender prefers. Your company’s financial history will be used to calculate your business credit score. Lenders will then use it before approving a business loan application to determine whether your company will likely repay any debt owed.
Businesses with no history of missing loan payments are more likely to be offered highly competitive interest rates because they pose less risk to the lender. On the other hand, businesses that default or have multiple failed credit applications face more difficulties obtaining financing. Your credit score is considered when asking for a small business loan, regardless of how long your business has been in business. How trustworthy will you be when repaying a business loan if you can’t manage your credit?
Your business is new
Business lenders typically mandate a minimum period in business. It can range from six months to more than a year. You probably won’t meet these requirements if you’re looking for funding for a startup or starting a company from scratch. If your company is new, you may not have accumulated enough business credit history to qualify for a small business loan. It should be noted that vendors do not always automatically report your payments to business credit agencies. When you open an account with a new supplier or vendor, make certain that they report your payments so your company can build a good credit history.
Similarly, even if you have sufficient financial records and meet the minimum time-in-business requirements, your loan application may still be rejected because of insufficient business experience.
Without a doubt, even if you haven’t been in business for a very long time, you can have a very successful business and solid financials. However, you need to research your options before applying because the minimum time in business requirements depends on the lender and the type of financing. If you have already been turned down for a loan because you don’t have enough experience running a business, look into loans with softer requirements. Alternatively, consider delaying your reapplication and continuing to bootstrap your company.
You are not requesting enough money
Contrary to popular belief, the more money you request, the more likely you are to be approved for a bank loan. You typically can’t get business loans from a major bank for small sums of money because the cost of servicing small loans(under $100,000)is not worth it for banks.
Check your financial data and business strategy to ensure you are not underestimating the amount of capital you require. You might re apply and request a more significant amount. Look for an alternative financing source, such as a micro lender or invoice-based financing option that can make smaller loans if you don’t need more money than you already requested. If you require funding but don’t require a sizable lumpsum, consider alternatives to loans as well, such as a small business line of credit.
You have no collateral
Many lenders also require that borrowers pledge valuable business assets as collateral to reduce their risk. In the event of borrower default, the lender may attempt to recover the outstanding loan balance by taking possession of the asset. Loan collateral must therefore be valuable enough to cover the total amount of the outstanding loan. As a result, your loan application might be turned down if your company is young, you don’t have any assets to offer as security, or your assets are already pledged.
You can overcome this obstacle by selecting a lender that provides unauthorized business loans.Numerousalternativelendersalsoofferfundingwithouttraditionalcollateral.On the other hand, unsecured loans carry a higher risk for lenders. As a result, they frequently have higher interest rates and fees.
Cash flow limitations
One of the first considerations for lenders when determining whether to approve a small business loan is cash flow. They want to know that you have the sufficient cash flow to pay for your business expenses, repay the loan, and leave yourself with some extra cash. It can be a warning sign if your cash flow is inconsistent or you frequently experience seasonal slumps.
Lenders might be concerned that the cash flow history could signify future problems if the financial information suggests a poor or fluctuating cash flow. Even though it might not always be possible, lenders prefer stable business cash flow. If you provide multiple services or products, show all your company’s revenue sources—likewise the historical trend of those sales. Unsecured business loans are a great option if you need money immediately and are frequently simpler to get from alternative lenders.
You might need to consider your cash handling abilities if your loan application was denied because of poor cash flow. Poor cash flow is a significant factor in business failure. Use accounting software that makes it simple to create cash flow projections and reports, and then check your cash flow once a week to stay on top of things.
Your business is risky
Even a strong business plan might not be enough if you work in a field with high failure rates. For instance, because of their higher failure rates and potential for unstable revenue, lenders typically view restaurants as riskier than other business types. For this reason, specific industries, like the restaurant business, construction companies, agricultural enterprise, service industries like gambling, frequently have trouble getting approved for a bank loan.
Regulations that make it more difficult or expensive to operate in a sector can impact other industries. In other words, it makes a bank’s obligation to assume risk higher. As a result, banks frequently turn too their industries or tighten their qualification standards rather than take on that risk, making it even more inaccessible to most business owners.
Although you can’t change your industry, you can look for lenders who focus on it or shop at a reputable marketplace where you can compare your options.
Numerous alternative lenders target riskier industries and provide financing options that are more appropriate for those industries. However, these lenders may demand collateral or impose higher rates and fees to compensate for the increased risk.
One of the worst feelings is being turned down for a business loan when you need funding. But remember that you can try again, and it’s not personal. But once you get past the initial annoyance, it can be a teaching moment that prepares you for the next time.
Don’t let these obstacles prevent you from expanding your business successfully.
Micheal Oladejo is a Financial Risk advisor at BST Consulting with over 10 years experience in the banking industry.Article source: https://articlebiz.com
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