For a small business to grow into a large business, you need a loan unless you have exceptional sales and profit margins. A small business owner has quite a few places to go with a loan application. Banks seem to be one of your options most of the time. These homeowners may not realize that banks have recently built a reputation for turning down small business loans. It seems that banks are more interested in financing large companies for their profits. A bank can come up with a variety of reasons for declining approval for a small business loan. Some of the common reasons are as follows:
Reasons for Banks to Decline Your Small Business Loan
Credit history
One of the barriers between you and a business loan is 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 credit. One of the aspects of credit that is very important to banks is credit history. The length of your credit history can affect your loan approval negatively or positively.
The more information banks have to assess the creditworthiness of your business, the easier it will be for them to remit the loan to you. 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 know the term high risk business. In fact, lending institutions have created an entire industry for high-risk businesses to help them with loans, credit card payments, etc. A bank can consider many factors in evaluating its business as a high-risk business. You may be in a high-risk industry per se. Examples of such businesses are companies selling 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 in its own right, but you may have received too many chargebacks from your customers for shipped orders. 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 approves your loan application. While having a short credit history increases your chances of rejection, a long credit history isn’t always a savior as well. Any financial incident on your credit history that is not conducive to your business may force the bank to reject your application. One of the most important considerations is your business cash flow. When you have cash flow problems, you risk getting a “no” from the bank on your loan.
Your cash flow is a measure of how easily the bank repays the loan. If you have little cash flow, how will you handle refunds? 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 apply for a loan from the bank.
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 other sources. Once you’ve obtained your business financing from other sources, it makes sense to pay it back on time. Approaching 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 owes 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. However, what is lacking is a solid business plan and adequate 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 submit to the bank to get your loan approved.
- Income tax return
- Existing loan documents
- Personal financial documents
- Affiliations and ownership
- Commercial lease documents
- Company financial statements
Exceptional care must be taken when submitting these documents and submitting them to the bank. Any discrepancy can result in the rejection of the loan.
Customer concentration
This might come as a surprise to some, but many banks take this aspect of their business seriously. You should not forget that loans are investments from banks. The businesses that approach the banks are their vehicles to multiply their money in the form of interest. If the bank detects that your business has no potential to expand, it may reject your loan application. Think of a mom and dad 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 company has considerable profit margins, it relies on its regular customers for it. The bank might see it as a repayable loan, but not as an investment opportunity.
conclusion
The good news is that you have many financing options as a small business owner. Today, banks are just one of many options for financing your bank. You don’t necessarily have to apply for loans when you have crowdfunding platforms that actively help small businesses with their financing needs. If you are looking for a business loan from a bank, that is fine. However, if the bank doesn’t approve your application, you shouldn’t be too concerned.