8 Reasons Your Business Loan Was Rejected
As a growing business (or if you plan to start your own business), you may need office upgrades, new equipment, or an expansion. These are great for businesses, but they need funding. If you do not have enough funds for these plans, you may need to apply for a business loan. However, applying for a loan is tricky and most banks and lenders reject almost 50% of the loan applications they receive. Why do banks and lenders turn down business loan applications? Here are 8 reasons why business loans are getting rejected:
1) Bad credit score
When applying for a business loan, lenders or banks always evaluate the applicant’s credit history. It is one of the most important factors that can affect your loan’s outcome. If you have an existing or past loans, which you have failed to pay from time to time; or worse, you have defaulted them altogether, chances are, your business loan will get rejected.
Credit card and utility bills also have the same impact on your credit score. Take care of your credit history and maintain a good score by paying your debts and bills and updating them regularly.
2) Cash flow is Insufficient
A business cash flow shows its capacity to repay a loan after the operating expenses are deducted. Lenders want to see if you can secure a monthly loan payment on top of your expenses to pay the rent, maintain the inventory, and provide for the payroll. If these are not met, it only means that your business is spending more than what you earn.
Most lenders are not confident to grant a loan to businesses with insufficient cash flow. This issue can be resolved, although not easily, by doing proper invoicing, minimizing unnecessary expenses, and arranging for an emergency fund.
3) Your business is a start-up
Lenders always look at a business track record. Loan approvals are typically based on your experience in the industry and good track record. If your business has been operating for less than two years, getting a business loan approved might be a challenge.
4) Inadequate business plan
If you do not have a concrete business plan, chances are, your business will be seen by lenders as unprepared and incapable of managing any loan grant. If you do not have a sufficient business plan, they may think you have the wrong reasons to apply for a loan. What are you going to do with the funds? Are you planning to expand your business or do you only want to upgrade your office with unnecessary assets?
The absence of long-term business plans may mean that you fall short of the knowledge needed to reach your consumers, making your claims about future profits and the ability to repay the loan questionable.
5) Limited collateral
Most, if not all, lenders require assurance or collateral when applying for a loan. They do not want to risk lending your business money if you cannot promise some sort of reimbursement. To make things short, they want a tangible property that they can take as payment in case you fail to pay them in cash.
If you cannot present adequate collateral to back your loan up, the lenders will think that they are less likely to get paid, hence, your loan will be rejected.
6) You or your company have too much debt
If your business is already deep in debt, most lenders will be hesitant to finance it. Too much debt reflects the company’s lack of money management skills and insufficient revenue. While it is common for businesses to have loans from other financiers, it will help if you keep your loan payments updated and maintain the balances low on your existing credits.
7) Borrowing from the wrong lender
As a starter, you must tread carefully and study different lenders’ criteria before applying for a loan. Lenders have varying criteria in terms of business loan assessment. One lender may focus on specific businesses while the other may be more favorable to a broader group of industries. In addition, they have their own standards but these are more likely to cover Character, Collateral, Capital, Capacity and Condition or the 5 C’s of credit.
8) The industry’s current condition
Lenders will evaluate every single detail about your business. Hence, they will see if your industry is thriving and if your business will be capable of adjusting when needed. Your loan will get rejected if the lender sees otherwise.