For a small business to grow into a large business, it needs loans as long as its sales and profit margins are exceptional. A small business owner has very few places he/she can go with a loan request. Banks seem to be one of their options on most occasions. What these owners may not know is that banks have recently developed a reputation for turning down small business loans. It seems that banks are more interested in financing large businesses because of their benefits. There are many reasons a bank may come up with for declining a loan approval for a small business. Some common reasons are as follows:
Reasons for Banks Rejecting Your Small Business Loan
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 loan does not affect their business loans. But this is not always the case. Most banks look at both types of credit. One aspect of credit that matters a lot to banks is credit history. The length of your credit history can negatively or positively affect your loan approval.
The more information banks have to assess the creditworthiness of your business, the easier it will be for them to loan you. However, if your business is new and you have a short credit history, banks may not be ready to give you the desired loan.
You must be aware of the term high risk business. In fact, lending institutions have created an entire industry out of helping high-risk businesses with loans, credit card payments, etc. A bank may consider a number of factors to assess your business as high risk. Perhaps you belong to an industry that is high risk. 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 the activities of your business can also make it a high risk business.
For example, your business may not be a high-risk business in itself, but you may have received a lot of charge-backs on orders shipped from your customers. In that case, the bank will view you as a risky investment and may ultimately reject your loan application.
As said earlier, your credit history matters a lot when a bank approves your loan request. While a short credit history increases your chances of rejection, a long credit history isn’t always a savior either. Any financial events on your credit history that are not in favor of your business may force the bank to reject 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 getting a “no” from the bank for your loan.
Your cash flow is a measure for the bank to know how easily you repay the loan. If you are tight on cash flow, how will you manage repayment? However, cash flow is one of the factors you control. Find ways to increase your revenue and reduce your expenses. Once you have the correct balance, you can approach the bank for the loan.
One mistake small business owners often make is trying multiple places for loans. They will avoid going to the bank in the first place but will get loans from many other sources in the meantime. Once you get your business funding from other sources, it makes sense to pay it back over time. It is not at all advisable to approach a bank when you already have a lot of debt to repay. Keep in mind that the amount of debt owed to you or your business affects your credit score as well. In short, the bank doesn’t even need to do an inquiry to know your credit score. An overview of your credit report can tell the story.
Sometimes your business is doing well and your credit score is also good. However, there is a lack of a solid business plan and proper preparation for loan approval. If you haven’t already figured out, banks require you to submit a lot of documents along with your loan approval request. Here are just a few documents that you need to submit to the bank to get your loan sanctioned.
income tax return
existing loan documents
personal financial documents
affiliation and ownership
business lease documents
business financial statements
You have to be especially careful while presenting these documents and the bank. Any discrepancies may result in loan rejection.
It may come as a surprise to some, but many banks take this aspect of your business seriously. You should not forget that loans are investments of banks. Businesses approaching banks are their vehicles for multiplying their money in the form of interest. If the bank feels that your business does not have the potential to expand, it may decline your loan request. Think of a mom and pop shop in a small town with a small population. If it only serves people in that city and has no prospects for further growth, then a rejection is imminent.
In this particular case, even though the business has a considerable profit margin, it depends on its regular customers for that. Bank may see it as refundable loan but not as investment opportunity.
The good news is that you have several funding options. small business Owner. Today, banks are only one of many options for you to fund your bank. You don’t need to apply for a loan when you have a crowdfunding platform actively helping small businesses with their funding needs. If you are seeking a business loan from a bank, that’s fine. However, if the bank does not accept your request, it should not worry you much.