5 Issues That Cause Small Businesses’ Loan Request to Be Rejected

                

Starting a business and keeping it on track can be extremely difficult in the first few years, especially if the financial climate is less than favourable. Whether you need the money to pay unexpected expenses such as repairing a piece of equipment, or you are looking for financing to upgrade your existing ones, loans are the best choice. Furthermore, most banks, as well as a large number of private lenders try to make it as easy as possible for small businesses to secure the financing that they need. However, this does not mean that everyone who applies for a loan will automatically receive one. Banks still hand-pick the borrowers that fit their requirements best.

This may mean that if you apply for a loan and the financial status of the business is not appropriate, your request will be rejected without any explanation. If this happens, there are 5 reasons that you need to take into consideration. Here is what you need to know:

  1. Bad Credit

This is the most often encountered issue. If a business has not yet ended its first fiscal year, the lender may not have enough information to assess the risk of approving the loan request. This would normally be made clear right from the start when the borrower sent the application. However, in certain situations, the lender may look at the credit file of the owner in order to make a decision. If the owner has bad credit (or the business, for that matter), the loan request may be rejected without any clear explanation.

  • Not Enough Cash Flow

Businesses that have humble beginnings may not have enough cash flow to have their loan request approved. This, however, can be circumvented by requesting a different type of loan. In most cases, if the lender refuses the loan, for this reason, he might agree to a smaller one, or one that has different terms and conditions.

  • Not Enough Time in Business

Lenders need to analyse the financial history of a business in order to calculate its credit rating and decide if they are to approve or reject the credit request. In most cases, getting a loan requires at least one full fiscal year to have passed, however, larger forms of funding such as a line of credit may require several more. In some cases, this can be circumvented by offering a valuable property as collateral; however, this is not always possible.

  • Not Enough Collateral

Generally speaking, business loans require appropriate collateral. If the lender concludes that a business does not have a property that is valuable enough to serve as collateral, he may reject the loan request.

  • Lack of Preparation

There is more to getting a business loan than simply filling out a loan request form. Lenders regularly require businesses to submit additional documents such as written business plans, financial statements, projections, bank statements and personal and business credit reports. If any of these are not in order, the loan request may be rejected.

Of all these documents, the most important ones are the business plan and the projections. Lenders need to see that the loan request comes from a business that has a clear financial objective and that the owner knows how to use the financing to increase profits. Make sure to include as much documentation as possible, as part of your loan request. If you are currently developing a new product or service, mention it and explain how it will benefit from the loan. Also, specify how the product will help the business earn money.

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