6 Reasons: Businesses Are Rejected for Small Business Loans
Feb 17,2020 Digital Loan, Online Borrowing
Are you looking to apply for a loan for your small business?
Are you not sure if your loan will get approved?
Chances are it will not get approved, as it has been observed over the years that banks are notoriously reluctant to lend to small businesses. According to a recent survey by on-deck of over 10,000 business applicants, a whopping 82% were denied financing by their bank.
A small business loan is an amount borrowed by a business person to expand, start or run their small business.
If the loan is taken to expand, this means that the business is running smoothly and there are chances that the business will turn to be a profit-earning one, but in the case of starting or maintaining the existing volume of business, it is clear that the business is not making money and granting loan to such a business could be risky.
No one likes a 'NO'. And when you get a rejection for the much-needed help, it is indeed heartbreaking. But, you need to understand that there are certain reasons why small business loans are rejected and you should try to avoid the following listed six reasons before you apply for a loan for your small business:
1. You have a weak cash flow:
The loan is provided with the view of getting the principal amount back along with the interest. If a weak cash flow starts then you do not have much money, then how will you even pay the principal amount, keeping the interest on the side? The bank is there to earn money and if they feel a little risk also, they will not sanction the loan. Your business should have money on-hand that can pay your payrolls, inventory and other business expenses. After paying all this, you should even have money left which you can spare to pay your installments. If your business is working on lower margins, you should try to find ways through which you can raise it or you should work towards lowering the expenses, before you apply for the loan. You must understand your money flow and see how much money is flowing through different operations. Make sure that there is more money coming in than going out. Try tips like using productivity-increasing tools like smart sheets or smartsheet alternatives, automating your processes, etc to increase your productivity and earnings.
2. Lack of preparation:
You need to understand that getting a loan sanctioned is really a big deal, and you cannot just walk in the bank and ask for a loan and expect to get one. We are most careful where we invest our money and so is the bank. Some businesses are turned down just because the owner is not prepared. You should have all the important documents and files ready with you. You should have a written business plan, financial projections or statements, tax returns, bank statements, personal and business credit reports, etc. according to your loan project scope. The first impression leaves a huge impact, therefore go fully loaded to apply for a loan. Have all the documents ready and filed. You should also carry legal documents like the article of incorporation, leases, contracts or any license or permit if you have one.
3. Absence of collateral:
The bank is not your relative. They will need assurance that you will pay it back and they also need a way to get the money back from you, in case you are not able to pay it back. Collateral serves as an alternative in case you refuse to pay the money back. The amount that the bank will lend you depends on the price of your asset. You can use your home or your car as collateral, which is the most commonly used form of collateral, but it depends on the bank if they consider your asset as valuable or not and if they do, then only they will approve your loan. But do remember that when you use your asset as a collateral, the bank now has the right to sell your assets if you fail to pay your installments. Therefore, plan your installments scheduling carefully and on time. The problem here is that many small business owners do not possess any assets and if they do, they are not willing to use it as collateral. But, you should remember that you have to lose something to earn something, moreover, if you are sure that you can repay the bank's loan, there is no need to worry about your asset as if you will repay the loan's amount, the asset will be yours again.
4. Bad credit history:
Predictions are made upon past encounters. Therefore, banks use your past credit history in order to know whether you can be trusted or not. Banks use your credit score to check your credit history. A credit score is a measure of a person's or a business's creditworthiness. Your credit score depends on whether you were able to pay the installments of your previous loans on time or not. If you haven't paid your installments or you have paid them late, that will be a major issue and your loan will not get approved. No credit history also becomes a problem, if you had a credit history, it would have served as proof that you pay your installments and you can be trusted.
5. Seeking small loans:
Most small businesses seek loans of less than $100,000, according to a 2014 Harvard Business School working paper by Karen Mills, a former SBA administrator. The banks want to have more and more profits. They want to give bigger loans in order to earn more profits. It costs them the same if they provide you with a small or a big loan.
6. Your business is small as well as new:
You may have problems getting a loan if your business hasn't been operating for a long enough time. Banks want to invest in businesses that are running successfully, but if you are new in the business, how can the bank predict if your business will be successful or not? Long-running businesses reassure the bank that you can pay the money back and that you can be their long term customer. Therefore you should wait sometime before applying for a loan.
Shyamal is the Founder of SmartTask, an online work management tool that's helping teams be more productive by having clarity on who's doing what by when. Has a penchant for researching and sharing strategies that could benefit a team's productivity.