The 5 Common Reasons for Rejection of Small Loans for Your Business
Lets’ be very honest rejection is a drag we could all do with a little less of in our lives. For small business owners it can be a real battle when entering into a dialogue with the banks over finance and prospective loans etc. According to recent research only 50-55% of small business owners nationally successfully secured finance packages of the sum requested over the past 12 months. The 5 common reasons for rejection of small business loans are:
The 5 Most Common Reasons for Rejection
- Bad Credit or No Credit
A credit score is a measure of an individual’s or a business’s overall credit worthiness. Banks predictably will examine look both personal and business credit scores before arriving at lending decisions and or setting interest rates. Every person or business has numerous or distinctive credit scores, reported by various credit agencies etc. Each credit agency calculates credit scores in a slightly different manner and it can often be difficult to understand exactly how they arrived at a certain score. Basically, a credit score can be low for a number of reasons such as late or failed payments or a period of bankruptcy etc. In some cases a small business may simply be too new to establish sufficient credit history to be eligible for a business loan. To fast track a positive credit score it is recommended to make payments regularly and on time, spend well under the credit limit and maintain existing accounts in a healthy financial condition.
- Lack of Collateral
Traditional banks commonly require a form of collateral, perhaps a piece of property, that can act as a guarantee for a loan in the event of slow or failed repayment, although for small businesses who may not have significant equipment or real estate property to offer as a form of collateral, the bank may be hesitant or unwilling to commit to a loan or finance package in this case. Unsurprisingly the figure a bank will lend depends on the total value of the asset or assets. Homes and cars are the most common form of collateral but if the small business owner doesn’t own enough items that the bank considers to be of high enough value, the chances of securing a small business loan will be slim to none. In this case, it is wise to have your financial situation carefully assessed by an institution with a long history of helping clients and small business owners meet their financial goals and business objectives etc.
- Weak Cash Flow
Banks are in the business of covering their outlay, they look for empirical evidence that businesses have sufficient funds to meet monthly loan repayments regularly and on time in addition to meeting rent, payroll, inventory and other cost commitments. The reality is that many small businesses struggle to keep enough cash in the bank even in times of profitability often because they have to pay third-party suppliers upfront before they receive a revenue stream for the product or service they provide.
Business owners need to be vigilant of exactly how much money is flowing through the operation. If more money is going out than coming in they need to make adjustments and changes to reverse the trend sooner rather than later. If your business has too tight of a margin, it is advisable to work toward lowering expenses and or locating ways to build revenue and strengthen a credit report before applying for a small business loan. Cash flow will always be a challenge for such businesses, the timing of speaking with a traditional bank or lending centre will be instrumental in negotiating a positive result.
- Lack of Preparation
Many small business owners get turned down on a loan because they simply haven’t done their homework. Some business owners just aren’t well informed of the loan application process and mistakenly expect to walk into a bank, fill out a form and walk out with a bundle of cash unfortunately the process is somewhat more complicated and there is a long list of detailed criteria small business owners need to meet to get a loan request approved.
Before applying for a small business loan, businesses will need to produce an up to date, written business plan, detailed financial statements, personal and business credit reports, tax returns and a period of bank statements. They should also have copies of relevant legal documents including articles, contracts, leases, and any relevant licenses and permits etc.
- Seeking Small Loans
It is well documented that many small businesses put in applications for medium sized loans often totalling less than $100,000, unfortunately in this regard banks want to underwrite larger loans because it’s more profitable for them. It costs a bank about the same amount to process a $50,000 loan as it does a $1 million loan, but the latter will generate a far greater return. So small business owners need to be aware that a loan request should be as substantial as possible of course within the realms of possibility in terms of meeting a repayment plan regularly and on time.