02 Dec Possible Reasons Why Banks Reject Small Business Loan Applications
If you have a startup or a small business, you probably know what it feels like to be turned down by potential customers, investors and even banks. From July to December 2014, only 50% of those who applied for a business loan received an amount, according to a Federal Reserve Bank survey. If you applied for one and were turned down, you’re definitely not alone.
The good news is, there are alternative forms of financing for those who can’t get a loan from a bank. You can consider merchant cash advances, which are known to have less stringent requirements and higher approval rates than banks.
But here are some of the main reasons why business loans are rejected:
- Poor credit or no credit
Even if you’re applying for a business loan, banks also look at your personal credit score, aside from your business credit score to help them decide whether to give you a loan and how much your interest rate will be.
Credit bureaus are the ones that calculate credit scores, and the businesses and individuals who have low scores (due to late or missed payments, bankruptcy, etc) are often rejected by banks.
Having no credit score or history is just as bad because the bank would have no way to determine an applicant’s creditworthiness. Build your credit score first before applying for a bank loan.
- No collateral
A bank needs collateral before they will lend you money. Collateral is basically a physical property used to guarantee a loan if the borrower is unable to pay off his debt. Startup businesses may not have anything they can offer as collateral, and in such cases, they are likely to be turned down by the bank.
- Insufficient cash flow
A key indicator of a business’ ability to pay off his loan is cash flow. Does the business make enough money each month to pay the bank, after all operational expenses are paid like payroll, rent, and inventory? If the business is struggling to make any money, then chances are, the bank will refuse to give them a loan.
- Lack of preparation
Applying for a business loan should be considered a serious undertaking, and the amount of preparation you do will have an impact on whether the bank will grant you a loan or not. First of all, you’ll need a business plan (written as detailed as possible), financial projections, income statements, credit reports, bank statements and tax returns, and legal documentation such as licenses, permits, etc. You can’t simply go to a bank and tell them you need a loan. You have to be prepared with all the necessary documents even before they ask for them, and then provide all the required information in the application form.
Keep these things in mind when applying for a loan. If you still get turned down, then consider other options for financing so you can continue to operate and even grow your business.