6 Reasons Small Businesses Get Rejected For Loans
Have you been trying to apply for a small business loan without any glimpse of success? If so, then you should know that thousands of others are undergoing similar experience across the globe. Actually, research shows that 74% of small business loan applications are rejected by many lending institutions especially the banks and some alternative small business loans lenders. This might be a high figure but not surprising at all. This is because, a couple of reasons exists to justify the reluctance of lending institutions to give loans to small businesses. Therefore, if you want to increase the odds of approval, you ought to familiarize with these reasons and how to lessen the risks.
- Your business lacks a significant history
Lenders usually feel comfortable when extending loans to those enterprises which have been operating for a relatively long period. This way, the lender is able to assess the credit worthiness of a business as well as its ability to repay back. Therefore, for a new company, it is difficult to convince a lender with a word of mouth or a mere business plan without a compelling operation history. However, this should not discourage new entrepreneurs as they can seek funding from other sources which usually don’t dwell much on operation history. Some of such lenders include the Venture Capitalist Investors, crowdfunding, and many others.
2. Your business is in a high-risk industry
Traditional lending institutions have got strict rules which they usually prioritize while gauging the qualifications of loan applicants. One of such rules is the assessment of a business failure rate. This is whereby a bank will determine whether the business to be funded is likely to thrive or fail in future depending on various micro and macro economy factors as determined by the lender. Therefore, once a bank has considered your business to have high failure rate, the chances of receiving funding is almost zero. The solution to this is seeking alternative lenders and also seeking for recommendation from other entrepreneurs in the same industry.
3. Weak cash flow
When your business lacks a solid and strong cash flow, chances of having your loan approved are very minimal. The reason for this is that lenders will question the ability of your business to service the loan on full and also on time. Therefore, prior to delivering the application, make it your priority to assess the financial statements of your business and come up with a plan on how you will be repaying the loan on monthly basis. To boost the financial flow of your business, make sure all the goods or services delivered are paid on time if not promptly.
4. Poor Credit score
Lenders usually check the personal or business credit score to determine the worthiness of extending a loan. If the business is new, some lenders will go for the personal credit score especially if the business has no long history. Therefore, if the score happens to be below a certain acceptable threshold, then the chances of having loan approved is very low. To address this, usually check both personal and your business credit reports and ensure any existing anomaly is fixed before applying for a loan.
5. Lack of Plan
While applying for a small business loan, it is prudent to build a strong case which will remove doubts from a lender on your capability to repay. One of such ways of building a solid case is having a candid plan on how to use the loan as well as the repayment plan. If this plan lacks, or is not strong enough to convince the lender, then chances of approval are very low. Therefore, always develop a solid plan and perhaps let a friend have a look at it before you go for the loan.
6. Applying for very low amount
I know you are wondering how asking for too little will affect your chances of securing a loan. Well, it depends from where you are sourcing the loan. Usually, commercial banks prefer issuing large loans since they obtain more profits from them as opposed to the small ones. Since the resources and efforts required to service both the small and large loans are the same, banks will often be reluctant to offer a loan of less than $250,000. However, applying for a very large amount without a solid plan on how to repay will also get you rejected. Therefore, always purpose to understand the standard amount which you can get from the bank by perhaps asking friends.
Being aware of the above reasons why a small business loan application might fail is the first step towards securing a successful funding. Therefore, keep note of the above points and they will surely help you in your future small business loan application.