Running a business can be a very gratifying experience. You get to be your own boss and dictate how you want to run the show. However, a business requires a healthy dose of capital to sustain itself. This could be a loan to start a business, invest in further expansion, or finance capital expenditure. To keep a business alive, the infusion of capital at the right time is vital. One way to balance your finances is by taking a business loan. Unfortunately, for some businesses, getting a business loan is easier said than done. Applicants face rejections from banks for various reasons. While this can be disheartening, it’s very important to know why rejection happens in the first place. This way, the next time you apply for a business loan your chances for approval will be higher.
Let’s look at some of the major reasons for bank loan rejections.
#1 Poor Company Credit Score
Poor credit score is perhaps one of the biggest reasons why a business faces rejection while applying for a loan. A company’s credit score is the history of all the credit (good and bad) that a company has undertaken. Good practices like paying loans on-time or maintaining a good credit ratio will help improve your score. One the other hand, any negative impact like missed payments or bounced cheques can have a detrimental impact on your credit score. What’s more, banks often check the personal credit score of the business owner. This is done when the company does not have a long credit history to substantially give a bank the full picture of the establishment’s creditworthiness. It then uses the personal credit score of the business owner as a yard-stick for creditworthiness.
#2 Inadequate Cash Flow
Adequate cash flow is a great indicator of the health of the business. This is why banks check the businesses cash flow to ascertain the repayment capacity of the borrower. A business with poor cash flow (expenses exceed income) generally has a lower chance of approval. To avoid rejection, businesses (especially small business) need to maintain a healthy balance between current assets and short-term liabilities and manage their cash reserves carefully.
#3 Lack of Documentation
Banks look for paperwork that validates a business’s standing. This could be in the form of documentation like bank statements, tax returns (business and personal), business plans, legal documents, and more. Not being able to provide all the necessary documentation sends a very wrong message to the bank. Oftentimes, new business owners lack experience when dealing with banks. This results in them missing-out on crucial documentation that is necessary for the loan application process. This leads to straight-out rejection of the loan application. A bank considers a business loan a risk (till they’ve recovered the principal + interest). An applicant without the proper documentation is considered “high risk” and not fit for credit.
#4 Inadequate Collateral
To minimize risk, banks look for collateral that an applicant can put up as guarantee of payment. This is to ensure that if the business defaults on loan repayments, the bank can recover the loan amount through the collateral. Unfortunately, most small businesses don’t have the much needed collateral to back-up their loan application. In many cases, especially when a business is just getting started, having adequate collateral is a necessity to clear the loan application process.
#5 High Risk
There are a number of businesses that operate in unfavourable conditions or are more prone to risks. An example could be a mining company where an accident could force the business to temporarily shut shop. As a result, the possibility of repayment of the loan will be hindered. Another example is a stock broking company where the business operates in a highly volatile environment. A bank may reject the loan application due to the inherent risk involved just in the nature of business.
To ensure that borrowers avoid rejection, this list can be an excellent tool that will help in the loan approval process. Getting a loan is just half the task, working towards successfully running your business and repaying the loan is important in the long run. If you are looking for a loan to get your business off the ground, consider Finserv MARKETS. An online business loan, available on Finserv MARKETS, can help you meet a range of business needs and requirements. This business loans come with a slew of benefits, like attractive business loan interest rate, easy application, quick disbursal and flexible repayment tenure