It can be a challenge for small business owners when discussing with the banks for acquiring a business loan. As per a recent study, around 50% to 55% of small business owners nationwide successfully obtained probable finance and loan packages of the sum requested over the past one year. Top five reasons behind the rejection of small business loans are as follows:
- No Preparation
Some business owners are rejected for a loan and the simplest example is that they have failed to follow the set procedure. Some business owners aren’t aware of the application procedure and think that they can just walk into a bank, fill out a form and walk out with a bag full of cash. Unluckily the procedure is somewhat more intricate and there is a long list of comprehensive criteria that small business owners need to meet to get a loan request approved.
Prior to applying for a small business loan, businesses will require submitting the latest up-to-date written business plan, a period of bank statements, comprehensive financial statements, personal and business credit reports, tax returns etc. They must also have copies of applicable legal documents that include contracts, leases and any applicable licenses and permits etc.
- Looking for Small Loans
It is documented fact that many small businesses put in their applications for medium sized loans totalling less than $100,000; regrettably, in this respect, banks want to finance bigger loans because it’s more profitable for them. To process a $60,000 loan and a $1 million loan, it costs the bank around the same amount; however, the $1 million loan will make a greater return and so it is more profitable for the bank.
Thus, small business owners should be conscious that a loan request should be as sizeable as possible, obviously within the sphere of possibility in terms of meeting a repayment plan on a timely and regular basis.
- Poor Cash Flow
Suppose your business has a very tight margin then it is recommended to work toward reducing expenses or finding ways to make revenue and strengthen a credit report prior to applying for a small business loan.
For similar businesses, cash flow will always be a challenge – the right timing of discussing with a lending centre or traditional bank will be influential in negotiating a positive outcome.
- Bad Credit/ No Credit
A credit score is a measure of overall credit worth of an individual or a business. Generally it’s very much hard to get bad credit loans for businesses. Before coming to lending decisions and/or setting interest rates, banks predictably will inspect both personal and business credit scores. Failed or late payments or a period of bankruptcy etc. will result in a low credit score. In some cases, a small business may simply be too new to demonstrate adequate credit history to qualify for a business loan.
To improve your credit scores, it is recommended to spend prudently under the credit limit, make regular & timely payments as well as uphold existing accounts in a good financial state.
- Lack of Collateral
Conventional banks usually need a type of collateral, possibly a piece of property, which can act as a guarantee for a loan in the event of failed or slow repayment. The bank may be reluctant or hesitant to commit to a finance package or loan wherein small businesses don’t have significant real estate property or equipment to provide as a type of collateral.
Homes and cars are the regularly accepted forms of collateral by the traditional banks. Predictably the amount a bank will loan relies upon the total worth of the asset(s). If the small business owner doesn’t have enough asset(s) which the bank regards to be of adequate high value, the probabilities of obtaining a small business loan will not materialise.
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