5 Main Reasons Banks Turn Down Small-Business Owners for Loans

Posted by Evelyn Williams on December 23rd, 2020

Gaining an approval from the bank for your small-business loan can be much more difficult than you can even think of. There can be a lot of reasons for your recent loan getting rejected. Hence, considering a few factors before applying for a small-business loan would be helpful.

1. Poor Credit Score

A good credit score is identified through the credit history of the company. Initially, the bank looks for the credit history while assessing an application for business loan. If the business has proved to be efficient in managing its business as well as the directors personal finance, it should have a better credit score. 

The reason behind a poor credit score could be the late or irregular payments made by the business during the years. It also raises questions on your ability to take appropriate financial decisions. Another reason could be the inability to meet the financial obligations required as mentioned in a loan agreement.

But, you can definitely repair the credit score and make it up to the mark by paying your bills on-time, repairing any sort of error that has appeared in the credit reports, and controlling credit card spending, and as managing your credit card balances.

2. Weak Cash Flow

When providing loans to small businesses, banks make sure that the cash flow of the business is enough to be able to cover the payroll, rent, inventory and other expenses. The bank look to ensure that apart from all these expenses, the business is able to make monthly loan payments in addition to those business expenses.

There are times, when it becomes difficult for small businesses or business start-ups to maintain and keep enough money in their bank accounts even though they are profitable enough. This is because these small businesses have to pay third party suppliers even before they get paid for their services or products.

In order to solve this problem, small businesses need to maintain a strict budget. This way, the business owners get a clear idea about how much money it takes to run their business operations, and how much money is coming in.  Frail cash flow is a warning to businesses to cut down their expenses and find solutions to pull in extra money so that it does not become the reason for the rejection of the loan approval.

3. Collateral Deficiency

Banks intend not to take any risk while they lend money to businesses.  They make sure that the process of lending is done by acquiring proper knowledge on the terms of reimbursement. 

For this purpose, it is very important to prepare a collateral document which contains all the details regarding assets that one can offer as collateral. It can be personal or business assets and depreciation price can also influence or amount of the collateral.

4. Poor Business Plan

Lenders also look into the business plan as well as the prospects of the business while providing loan. Hence, to get your loan approved, you need to be very specific about the business plan and proper research needs to be done. Extensive research and better business strategies would help in improving your business plan effectively.

5. External Factors

Now if your small business has everything that is required to get your loan approved and still the loan application gets rejected, then it’s not your fault. In this case, there can be several external factors like location, industry experience, competitors, economic development and trends which are out of anyone’s control. Precisely, nothing much can be done in such case but it is better to apply for the loan when such external factors would be comparatively less influential or detrimental.  Hence, proper research on such factors is recommended before applying for a business loan.