6 Reasons Small Businesses Get Rejected For Loans
May 13, 2019 | Last Updated on: April 3, 2023
May 13, 2019 | Last Updated on: April 3, 2023
It can be challenging to get approved for a small business loan, especially if your business is new or if market conditions are poor. As many as 40% of small business loan applications are rejected. That’s a high percentage, but there are concrete reasons why those businesses’ loan applications get rejected. It’s worth knowing the most common reasons that small businesses are rejected for loans: There are actions you can take to alleviate these risks and to help facilitate future loan approval.
Lenders want to see that you have been successful in business. This reassures them that you will repay the loan on time and that you may be a long term customer.
Look into alternative borrowing opportunities. There are a number of funding sources for early stage companies. You might explore online lenders, business credit cards, SBA loans, crowdfunding like Kickstarter, or investment from Angel or Venture Capitalist investors.
Certain banks and other lenders have internal rules about the companies they will and will not lend to. For example, if a bank believes that your industry is especially risky, they may turn down your loan.
Turn to a community bank and get a personal introduction from a fellow entrepreneur who knows the banker. These banks can often be more flexible and creative in the loans they issue and may not be subject to as stringent of orders from the top. Online lenders such as Biz2Credit may also be willing to lend to your business.When you approach a potential lender, you should demonstrate that you know your industry inside and out. Be able to provide information that helps reassure the banker of the industry’s performance and your potential business’s success.
If your business already has a large amount of debt, a lender might be reluctant to loan you additional money. Their priority is making sure that you can pay your debts across the board.
Pay down excess debt, particularly high interest loans, in order to reduce your debt load. If you are struggling to pay your debts, you might try to strike a deal with the lender to pay a portion of what is owed, or to have a lower interest rate for a period of time. In dire circumstances, a business can consider bankruptcy to reduce its debt load, but this may make it hard to take on new debt in the future.
Lenders want to see that your business has free cash flow, which reassures them that you can service your debt – in other words: make principal and interest payments on time. It’s very important to have a strong grasp on your financials before applying for a loan. You’ll need to be prepared to speak to how you will have the money to repay the loan each month. The lender will also probably want to see your business plan, tax returns, and bank statements. Come to your application meeting prepared.
Take steps to improve your cash flow. Work on strengthening your revenues. Make sure you are collecting on payments from customers promptly. Do an audit of your accounts receivable and try to collect on any payments in arrears. Institute late payment penalties with customers if possible, and be sure to invoice quickly to prevent delays in collecting payment. On the other hand, try to extend the amount of time that you wait to pay your suppliers as long as possible to keep cash on hand for longer. Finally, cut unnecessary expenses whenever possible.
Ironic as it sounds, many banks don’t like giving small loans. The reason is that the costs to the lender to process a small loan are about the same as the large loan, but the profit is much less on the small loan. There are certain lenders who will provide smaller loans, and the Small Business Association (SBA) has a Microloan program that provides up to $50,000. Their average loan is $13,000.
Seek out a lender that will provide you with the micro-loan you need. Alternatively, brainstorm whether there are productive projects you can do with the additional capital from a larger loan.
Lenders want collateral (physical property) on hand that they can seize if you fail to repay a loan.
List everything that you can possibly put up as collateral. This can include personal assets such as your home or car. However, make sure you know what you are signing if you make a personal guarantee or use your personal assets to collateralize a small business loan, because if you default on your loan, the lender can and will come after those assets.
Getting approved for a small business loan can be a challenge, but if you make a plan and take steps towards fulfilling lender requirements, a small business loan may be in your future.