For a small business to grow into a big business, it needs a loan unless it has exceptional sales and profit margins. A small business owner has a number of places they can go with a loan request. Banks seem to be one of their options in most cases. What these owners may not realize is that banks have recently developed a reputation for turning down small business loans. It seems that banks are more interested in financing large enterprises because of their advantages. A bank can come up with a variety of reasons to deny approval for a small business loan. Some of the common reasons are as follows:
Reasons Banks Reject Your Small Business Loan
One of the barriers between you and a business loan is your 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 credit doesn’t factor into their business loans. But this is not always the case. Most banks consider both types of loans. One aspect of credit that is of great importance to banks is credit history. The length of your credit history can negatively or positively affect your credit approval.
The more information banks have to assess the creditworthiness of your business, the easier it is for them to forward you the loan. However, if your business is new and your credit history is short, banks will not be willing to grant you the desired loan.
You should be aware of the term high risk business. In fact, lending institutions have created an entire industry for high-risk businesses to help them with loans, credit card payments, etc. A bank can look at many factors to rate your business as high risk. Perhaps you belong to an industry that is inherently high-risk. Examples of such businesses are companies selling marijuana-based products, online gambling and casino platforms, blockchain-based dating services, etc. It is imperative that you 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 per se, but you may have received too many chargebacks for orders sent to you by your customers. In such a case, the bank will see you as a risky investment and may end up rejecting your loan application.
As stated earlier, your credit history matters a lot when the bank has to approve your loan request. Although a short credit history increases your chances of rejection, a long credit history is not always a lifesaver. Any financial incidents in your credit history that are not in favor of your business can 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 on your loan.
Your cash flow is a measure for the bank to know how easily you repay the loan. If you have limited cash flow, how will you manage repayments? However, cash flow is one of the controllable factors for you. Find ways to increase your income and decrease your expenses. Once you have the correct balance, you can approach the bank for a loan.
A mistake small business owners often make is trying too many loan places. They will avoid going to the bank in the first place, but in the meantime they will get loans from several other sources. Once you have received your business financing from other sources, it makes sense to pay it back on time. Turning to the bank when you already have a large debt to pay is not at all advisable. Keep in mind that the debt you or your business owes also affects your credit score. In short, the bank doesn’t even have to investigate to understand your debt. A review of your credit report can tell the story.
Sometimes your business is doing well and your credit score is in good shape too. What is missing, however, is a solid business plan and proper preparation for loan approval. If you haven’t figured it out yet, banks require you to submit a lot of documents with your loan application. Here are just some of the documents you will need to present to the bank to get your loan approved.
Income tax returns
Existing loan documents
Personal financial documents
Belongings and property
Business Lease Documents
Business financial statements
You should be extremely careful when presenting these documents to the bank. Any discrepancy may result in loan rejection.
Concentration of customers
This 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 the banks. Businesses turning to banks are their means of multiplying their money in the form of interest. If the bank feels that your business has no potential for expansion, it may reject your loan request. Consider a mom and dad store in a small town with a small population. If it serves only the people of that town and has no potential for further growth, rejection is inevitable.
In this particular case, even if the business has significant profit margins, it relies on its regular customers for that. The bank may see it as a repayable loan, but not as an investment opportunity.
The good news is that you have many financing options as a small business owner. Today, banks are just one of the many options for you to finance your bank. You don’t have to apply for loans when you have crowdfunding platforms actively helping small businesses with their funding needs. If you are looking for a business loan from a bank, that’s fine. However, if the bank does not approve your request, this should not worry you much.