5 Main Reasons Why Banks Reject Small Business Owners for Loans

You were counting on that small business loan to help your business grow, but the bank said “no.” If it makes you feel any better, you’re not alone.

However, getting rejected is never fun, even if the circumstances are out of your control. That’s why you should know exactly why your loan was rejected in the first place so that you can make sure that it never happens again. Typically for one or more of the following five reasons:

  1. Bad Credit

Credit history is one of the first things that lenders will review when assessing a business loan application. A good credit score proves that the business owner has properly managed both of their personal and business finances by making their payments on-time.

A poor credit score, however, can make lenders wary since it demonstrates that the individual can’t make well-informed financial decisions and are unable to meet the financial obligations that are included in the loan agreement.

The good news is that you can repair your low credit score by paying your bills on time, getting your credit card balances under control and repairing any errors that appear on credit reports. Keep in mind, bad credit on either the business owner or the business can impact the business getting a loan.

  1. Weak Cash Flow

Lenders are very concerned that businesses have enough cash flow to make monthly loan payments in addition to covering their payroll, stock, rent and other expenses. Many start-ups and small businesses struggle to keep enough money in their bank accounts even when they’re profitable, often because they have to pay 3rd-party suppliers upfront before they get paid for their product or service.

By creating a sticking to a budget, small business owners will have a better idea on how much cash is coming and going through your business operations, so that lenders won’t reject your application.

  1. Time in Business & Limited Collateral

Traditional business loans with a monthly repayments usually require that you need to be in business for at least two years.

You may even have difficulty qualifying for this type of loan until you’ve been operating for at least three years. The reason? Traditional loans require two full years of tax returns to prove consistent gross and net profits. Additionally, small businesses that are just starting out often don’t have the collateral, such as equipment or real estate, required if your business ever defaults on the loan. Online Fintech lenders use big data and performance analytics and can look at certain businesses which has only been trading for 6 months.

  1. Lack of Preparation

Many businesses don’t understand the application process and believe they can walk into a bank, fill out an application and get approved for a loan.

Prior to applying for a bank loan, you should have a business plan, financial statements or projections, personal and business credit reports, tax returns, and bank statements. Also included should be copies of legal documents, which include articles of incorporation, contracts, leases, or any licenses and permits that you need for your business to operate.

  1. External Conditions

What if you have a solid credit score, strong cash flow, collateral and have prepared everything you need for loan, but are still turned down? It could be no fault of your own. It may just be outside conditions that are out of your control.

They can include lack of industry experience, location, economic trends and competitors.

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