7 Reasons Why Bank Could Reject Your Business Loan: Getting a business loan successfully for SMEs can be a big challenge. This is especially more difficult for the first time SME business owners. Many people do not even know why their applications are being rejected. When you apply for a Business Loan from any bank or financial institution, the lender judges your ability to repay debt on various issues including your age, income, job stability and mainly your credit report, which is a reflection of your actual credit value.
Business loan approval is depending on various standards and principles and a loan stands a chance of rejection if these standards are not met. The most appropriate way to handle the business loan rejection is to research the reasons behind it and to improve your business loan eligibility criteria in your next loan application.
1) Poor Credit Score:
A good credit score reflects effective budget and expense management. If you have a bad credit score, it shows a lack of financial sense on your part. Before applying for a loan, you will have to see your credit score with the reputed credit rating agencies. One of the primary reasons for low scores is the use of the higher percentage of the credit amount. The ideal percentage is approximately 30% of the total available credit. There are many reasons why a credit score is required. One of them is your intention and the ability to repay your debt.
2) Insufficient Cash Flow:
This is probably the most important criterion which the financing institution is looking at. If the record shows that your company’s income hardly meets your expenses, then some borrower wants to look forward. It goes without saying that it is important for any company to manage cash flow very carefully. The more your profit margins, the more you will be able to borrow. Every lender just wants to know that you will be able to repay the money that they gave you.
Your cash flow analysis shows your ability to repay your debt after covering operating expenses. Insufficient cash flow affects the confidence of lenders. You can improve your cash flow by following these steps:
- Deducting unnecessary expenses
- Maintaining proper invoices
- Establishment of an emergency fund
3) Too Much Debt:
Any Financial Institute who lends you will always like to be your sole source of financing. If your company is already laden with debts from other loans, the most of the lenders will hesitate to increase any additional funding.
If your business is in a lot of debt, then it will turn away potential creditors. The primary concern of the lender is repayment. When a lender sees you a heap under heavy debt, it is natural to be a little careful. Maintaining a low credit balance and paying for past loans will help you resolve this issue.
4) You are an Early Stage of Business:
The track record is important. The lender usually wants to see a good track record and relevant experience in this area, before they begin to assess whether a company is eligible for a business loan or not. Without at least 6 months to 2 years of active revenues and operations, winning the trust of potential lenders can be very difficult.
However, it does not indicate the end of the road for start-ups. The good news is that there are alternative sources of funding for the new start-up, including crowdfunding, SME grants from the government, or even equity funding.
5) You Don’t Have a Solid Business Plan:
As with all business enterprises, a good business plan is fundamental. Without a solid business plan, investors probably will not consider your loan application. Ensure that you want to provide the Financing Institute with confidence, by ensuring that you are making a complete business plan with realistic sales and profit estimates. It will show that you have done your homework in the marketplace; you are clear in your vision and goals and know your business to succeed.
The business administration also recommends that except your business plan, you should also make sure that you have collected and prepared all your personal background details, bank details, resume, income tax returns, and financial statements, along with legal documents like articles of incorporation.
6) Lack of Collateral:
Some lenders do not want to risk the lending money to businesses unless they are assured of reimbursement. For example, a physical property or collateral that they can get hold of if a loan is not repaid. With a list of tangible assets, this includes both business and personal, which you can place as collateral for a loan, will be useful.
Investors look for tangible security to back up their investments. You should have a clear understanding of your list of properties that you can use as collateral before choosing a loan. If you are not in the stage to offer tangible assets, you may need to mortgage your personal assets to receive the required funds.
7) Not Having an Appropriate Purpose for Loan:
As a point of agreement and due attention, lenders will always ask for the purpose of the loan. As a rule of thumb, keep your answers general. Companies and individuals take business loans for various reasons. But note that the lenders will only support those loans which will be used by companies to grow their business, or working capital so that they can be assured of repayment.