By Katherine A loan is required for a small business to grow unless the company has outstanding sales and profit margins. There are many places that a small business owner can request a loan. Most of the time, banks are one of their options. These owners may not know that banks are notorious for refusing small business loans. Banks are more likely to finance large businesses because of their advantages. There are many reasons banks might refuse to approve small-business loans. Here are some common reasons banks may reject loan approval for small businesses:
Reasons Banks Cannot Reject Small Business Loans
Credit history
Credit history is one of the biggest barriers to getting a business loan. Banks will review your credit history, both personal and business. Many people believe that their personal credit doesn’t affect their business loans. This is not always true. The majority of banks examine both types of credit. Credit history is one of the most important aspects of credit. Your loan approval can be affected by the length of your credit history.
Banks will be more likely to approve your loan if they have as much information as possible to evaluate your creditworthiness. Banks will not approve you for the loan if your credit history and business aren’t good.
Risky Business
High-risk businesses are something you need to be aware of. Lending institutions have created a whole industry to assist high-risk business with credit card payments and loans. Banks can evaluate your business for high-risk status by looking at many factors. You might be in a high-risk industry. These businesses include those that sell marijuana-based products, online casinos platforms and casino sites, as well as dating services, blockchain-based service, and others. It is important to recognize that the activities of your business can make it high-risk.
Your business may not be high-risk, but you might have received too many chargebacks from customers on shipped orders. The bank might reject your loan application if you are deemed a risky investment.
Cash Flow
Your credit history is very important when it comes to approving your loan request. A short credit history can increase your chances of being rejected, but a good credit history doesn’t guarantee approval. Your bank may reject your application if you have any financial problems that are not favorable to your business. Cash flow is a key consideration. If you have cash flow problems, it is possible to get denied by the bank for your loan.
The bank uses your cash flow to determine how easy it is for you to repay the loan. How will you manage your repayments if you have poor cash flow? Cash flow is something you can control. You can increase your revenue and decrease your expenses by finding ways to do this. You can apply for a loan from the bank once you have the correct balance.
The Debt
Small business owners make the common mistake of trying too many lenders. They won’t go to the bank first, but they will get loans from other sources. It is a good idea to return the money you have received from other sources once your business has been funded. It is not a good idea to approach the bank if you have significant debt. Keep in mind that your credit score is affected by the amount of debt your company owes. The bank doesn’t even need to look into your debt. A review of your credit report may tell you the whole story.
The Preparation
Sometimes your business is doing well and your credit score looks good. A solid business plan is essential, as well as proper preparation for loan approval. Banks require that you submit a variety of documents to their loan approval request. These are just a few of the documents that you’ll need to submit to banks to be approved for your loan.
- Returns on income tax
- Existing loan documents
- Personal financial documents
- Ownership and affiliation
- Documents for business lease
- Statements of financial position
These documents should be presented to the bank with extreme care. Any discrepancies could lead to loan rejection.
Concentration of Customers
Although this may surprise some, many banks take this aspect of your company seriously. Loans are investments by banks. Banks are the vehicles for businesses to increase their capital through interest. The bank can refuse to approve your loan request if it feels that your company is not able to grow. Consider a mom-and-pop shop in a small community with a small number of residents. It will be rejected if it serves only the residents of the town and doesn’t have any potential to grow.
Even though the business may have a high profit margin, it still relies on its customers to make that happen. It might be viewed by the bank as a returnable loan, but not an investment opportunity.
Conclusion
There are many funding options available to small-business owners. Banks are just one option for funding your bank today. Crowdfunding platforms are available to help small businesses with funding. It’s okay to apply for a loan from a bank for your business. If the bank declines to approve your request, that should not be a problem.