For a small business to grow into a large business, it needs a loan unless there are exceptional sales and profit margins. A small business owner will have quite few places where they can go for a loan request. Banks seem to be one of their popular options on most occasions. What these owners won’t realize is that banks have recently developed a reputation for rejecting small business loans. It seems that banks are more fascinated by financing large businesses thanks to their benefits. A bank can come up with a spread of reasons to reject loan approval for a small business. A number of the common reasons are as follows:
Why Banks Reject Your Small Business Loan
Credit History
One of the barriers between you and that business loan is credit history. Once you head to a bank, they will look at your personal in addition to your business credit reports. Some people are under the impression that their personal credit doesn’t affect their business loans. But that’s not always the case. A majority of banks check out both the kinds of credits. One of the aspects of credit that matter tons to the banks is credit history. The length of your credit history can affect your authorization negatively or positively.
The more information banks have at hand to assess your business’ creditworthiness, the better it’s for them to forward you the loan. However, if your business is new and your credit history is brief, banks are going to be unwilling to forward you the required loan.
Risky Business
You must remember of the term high-risk business. In fact, lending institutions have created a whole industry for high-risk businesses to assist them with loans, credit card payments, etc. A bank can check out tons of things to gauge your business as a high-risk business. Perhaps you belong to an industry that’s high-risk intrinsically. Samples of such businesses are companies selling marijuana-based products, online gambling platforms, and casinos, dating services, blockchain-based services, etc. it’s imperative to know that your business’ activities also can make it a high-risk business.
For example, your business won’t be a high-risk business intrinsically, but perhaps you’ve received too many chargebacks on your shipped orders from your customers. Therein case, the bank will see you as a risky investment and might eventually reject your application.
Cash Flow
As stated earlier, your credit history matters tons when a bank is to approve your loan request. While having a brief credit history increases your chances of rejection, an extended credit history isn’t a savior either. Any financial incidents on your credit history that don’t favor your business can force the bank to reject your application. One among the most important considerations is the income of your business. Once you have income issues, you’re in danger of receiving a “no” from the bank for your loan.
Your income may be a measure for the bank to understand how easily you can pay the loan. If you’re tight on income, how will you manage the repayments? However, income is one of the best controllable factors for you. Find ways to extend your revenues and lower your expenses. Once you’ve got the proper balance, you’ll approach the bank for a loan.
The Debt
An error that small business owners always make is trying out too many places for loans. Approaching the bank once you have already got tons of debt to pay isn’t advisable in the least. Do keep in mind that the debt you or your business owes affects your credit score also. In short, the bank doesn’t even need to investigate to understand your debt. A summary of your credit report can tell the story.
The Preparation
Sometimes, your business is doing fine, and your credit score is in fine condition also. However, what’s missing may be a solid business plan and proper preparation for a loan. If you haven’t already found out, banks require you to present tons of documents together with your loan request. Here are just some of the documents you’ll need to present to the bank to possibly get approval for your loan.
- Income tax returns
- Existing loan documents
- Personal financial documents
- Affiliations and ownership
- Business lease documents
- Financial statements of the business
You have to be exceptionally cautious when these documents and offering them to the bank. Any inconsistencies may result in loan refusal.
Concentration of consumers
This one might come as a surprise to some, but tons of banks consider this aspect of your business seriously. You want to not forget that loans are banks’ investments. Businesses that approach the banks are their vehicles to multiply their money with interest. If the bank senses that your business doesn’t have the potential to expand, it can reject your loan request. consider a mom and pop shop in a very small town with a small population. If it only serves the people of that town and has no potential to grow further, a rejection is imminent.
In this particular case, although the business has considerable profit margins, it relies on its regular customers for that. The bank may see it as a returnable loan but not as an investment chance.
Conclusion
The good news is that you simply have tons of funding options as a small business owner. Today, banks are just one of the various options for you to fund your bank. you do not necessarily need to apply for loans once you have crowdfunding platforms actively helping small business with their funding needs. If you’re seeking a commercial loan from a bank, that’s fine. However, if the bank doesn’t approve your request, it shouldn’t worry you much.
