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You expected the small business loan to help your company expand, but the bank turned you down. You’re not alone, if that makes you feel any better.
Large banks have been decreasing the number of loans they provide to small companies during the past several years. Following the 2008 economic crisis, “weak demand, stricter lending criteria, and high expenses have placed a cap on small company borrowing,” according to the Wall Street Journal.
Rejection, on the other hand, is never pleasant, especially if the circumstances are beyond your control. That’s why you should figure out why your loan was turned down in the first place so you can avoid it in the future.
If a bank refuses to provide these data, I’ve discovered that it’s usually for one or more of the following five reasons:
A bad credit score
When reviewing a business loan application, one of the first things that lenders will look at is your credit history. By avoiding bankruptcy and completing all of their payments on time, a high credit score demonstrates that the company owner has effectively handled both their personal and corporate finances.
A low credit score, on the other hand, may make lenders nervous since it shows that the person can’t make well-informed financial choices and can’t fulfill the financial responsibilities outlined in the loan agreement. This is the number one reason why a payment processor like myself would refuse to take payments from you and your business.
The good news is that you may raise your credit score by paying your bills on time, managing your credit card balances (rather than canceling them), and correcting any errors on your credit reports. Keep in mind that a business’s credit score, whether it belongs to the owner of the company, may affect its ability to get a loan. I’ve compiled a list of additional credit misconceptions that you should be aware of.
A cash flow problem.
“Banks are extremely concerned that companies have the adequate cash flow to make monthly loan payments in addition to paying wages, merchandise, rent, and other costs,” TheLendingMag Media Group’s Warren Lee explains. “Unfortunately, even when they’re successful, many startups and small companies struggle to maintain enough money in their bank accounts, frequently because they have to pay third-party suppliers ahead before they are compensated for their product or service.”
Small company owners will have a better understanding of how much money is coming in and going out of their operations if they create and adhere to a budget. If you detect a lack of cash flow, you must reduce costs and discover methods to bring in more funds so that banks will not reject your application.
Limited collateral and time in business.
Obtaining a bank loan may seem to be one of the greatest methods for new small company owners to jump-start their businesses, or at the very least help them through their first difficult year. “Loans for such circumstances do exist,” writes Amy Blatterfein in a Venture Capital post. You won’t find them at your neighborhood bank, however. You’ll need to be in company for at least two years if you want a conventional simple interest business loan with a monthly payment.”
It’s possible that you won’t be able to get this kind of loan until you’ve been in business for at least three years. What is the cause behind this? Traditional loans need two years’ worth of tax returns to demonstrate continuous gross and net earnings. Furthermore, small companies that are just getting started frequently lack the necessary collateral, such as equipment or real estate, in the event that the loan is defaulted on.
If you’re just starting out, you may need to seek other sources of financing, such as peer-to-peer loans, crowdsourcing, or online merchants. Personal assets, like your house or car, may be used as collateral.
Inadequate planning
“Many companies think they can go into a bank, fill out an application, and be accepted for a loan,” says Mark Palmer, managing director, and analyst at BTIG.
The Small Company Administration recommends that you have a documented business plan, financial statements or forecasts, personal and business credit reports, tax records, and bank statements before applying for a bank loan. Copies of legal papers, such as articles of incorporation, contracts, leases, or other licenses and permissions required for your company to function, should also be included.
Weather conditions
What if you have a good credit score, steady cash flow, and all of the necessary collateral, but you’re still denied a loan? It may be due to circumstances beyond your control. It may just be a result of circumstances beyond your control.
“External factors are always taken into account prior to approving or declining a loan,” explains Diane Roehrig, president of Alacom Finance. “They may include things like industry experience (do you have the necessary job experience to run your own company), a company’s location, local or regional economic trends, and rivals.”
Furthermore, local, state, and federal laws, as well as variables such as local climatic conditions, may affect an applicant’s acceptance or rejection, according to Roehrig.
Since the 2008 crisis, banks have been more cautious, in part due to laws prohibiting banks from lending money to companies that are deemed high-risk. Small companies, unfortunately, are included in this category because they lack the demonstrated track record of established or bigger enterprises.
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