For a small business to grow into a large corporation, it needs a loan unless it has exceptional sales and profit margins. The small business owner has quite a few places he/she can go for a loan application. Banks seem to be one of their options on most occasions. What these owners may not realize is that banks have recently developed a reputation for refusing small business loans. It seems that banks are more interested in financing large companies because of their benefits. A bank can devise a variety of reasons for refusing to approve a small business loan. Some common causes are as follows:
Reasons why banks refuse your small business loan
One of the barriers between you and a business loan is your credit history. When you go to a bank, they look at your personal credit reports as well as business reports. Some people are under the impression that their personal credit does not affect their business loans. But this is not always the case. Most banks consider both types of credits. One aspect of credit that is of great interest to banks is credit history. The length of your credit history can affect loan approval negatively or positively.
The more information banks have to assess your company’s creditworthiness, the easier it will be for them to send you the loan. However, if your business is new and your credit history is short, the banks will not want to send you the required loan.
You must be familiar with the term high-risk business. In fact, lending institutions have created an entire industry of high-risk businesses to help them obtain loans, credit card payments, and so on. A bank can look at a lot of factors to assess your business as a high risk business. Perhaps you belong to a high-risk industry in and of itself. Examples of such companies are companies that sell marijuana-based products, online gambling platforms, casinos, dating services, blockchain-based services, and so on. It is essential that you understand that your business activities can also make it a risky business.
For example, your business may not be a high-risk activity per se, but you may have received a lot of refunds on your shipped orders from your customers. In this case, the bank will see that you are a risky investment and may eventually reject your loan application.
As mentioned earlier, your credit history matters a lot when the bank approves your loan application. While having a short credit history increases your chances of being rejected, a long credit history isn’t always a lifesaver either. Any financial incidents in your credit history that do not favor your business can force the bank to decline your application. One of the most important considerations is the cash flow of your business. When you have cash flow problems, you are at risk of receiving a “no” from the bank for your loan.
Your cash flow is a measure for the bank of how easy it is to return the loan. If you’re tight on cash flow, how will you manage repayment? However, cash flow is one factor that you can control. Find ways to increase your revenue and reduce your expenses. Once you have the right balance, you can approach the bank for a loan.
Small business owners often make the mistake of trying too many places to get loans. They will avoid going to the bank first but will get loans from several other sources in the meantime. Once you have obtained funding for your business from other sources, it makes sense to bring it back in time. Approaching the bank when you already have a lot of debts to pay is not recommended at all. Keep in mind that the debt you or your business owe affects your credit score as well. In short, the bank doesn’t even have to investigate to find out about your debts. An overview of your credit report can tell the story.
Sometimes, your business is doing just fine, and your credit score is doing just fine, too. However, what is lacking is a solid business plan and proper loan approval preparation. If you haven’t already found out, banks will require you to submit a lot of documents with your loan approval application. Below are some of the documents that you will have to submit to the bank to get your loan approved.
- Income tax returns
- Current loan documents
- Personal financial documents
- Affiliations and ownership
- Commercial lease documents
- Business financial data
You must be exceptionally careful when submitting and submitting these documents to the bank. Any discrepancies can lead to loan refusal.
This may come as a surprise to some, but a lot of banks look at this aspect of your business very seriously. You must not forget that loans are the investments of banks. Businesses that approach banks are their tools to multiply their money in the form of interest. If the bank feels that your business does not have the capacity to expand, it can reject your loan application. Think of a mom and pop shop in a small town with few residents. If it only serves the population of that city and has no capacity to grow further, rejection is imminent.
In this particular case, even if the company has large profit margins, it relies on its regular customers for that. The bank may see it as a returnable loan but not as an investment opportunity.
The good news is that you have a lot of financing options as a file small business What is with you. Today, banks are just one of the many options you have for financing your bank. You don’t necessarily have to apply for loans when you have crowdfunding platforms that are actively helping small businesses with their financing needs. If you are seeking a business loan from a bank, that is fine. However, if the bank does not approve your application, you should not worry too much.