These days it’s almost impossible for a small business to sustain itself without seeking additional capital. You will always need capital to purchase inventory, hire employees or to open a new store. Any expansion or growth activity for business will involve the need for more capital.
Banks generally offer the best interest rates as well as the most favorable repayment terms. But, the reality is that it’s becoming more and more difficult for small business owners to secure a bank loan.
In this article we will outline the top 9 reasons why banks are rejecting most small business loan applications:
1. Lack Of Regular Cash Flow
Banks are more inclined to grant loans to businesses that boast a healthy cash flow along with a steady income stream. If your business can’t showcase such financial consistency, it will significantly reduce your chances of being approved for a loan.
2. Inadequate Collateral
Lack of adequate collateral will hamper your chances of gaining finance from a bank. Banks typically need a feasible piece of collateral mentioned in the loan application, in order to process the application and consider it worthy of approval. This is not a big problem for some of the bigger business establishments, but at the same time, it can overwhelm many small business owners.
3. Debt To Income Ratio
Banks usually avoid lending to businesses that already have debt with another lender. In most scenarios, they will almost always look to avoid lending to a business that has already secured extra financing.
Small business owners usually avail credit from a number of sources, especially when the company is in its startup phase. This affects their ability to secure a more traditional line of credit or an overdraft from a bank.
4. Customer Concentrations
In most cases, banks are wary of businesses that report a considerable portion of their sales from a specific group of customers. Every lender prefers versatility in a business’s clientele as opposed to complete dependence on the same set of customers.
For example, if you own a restaurant that generates a steady income stream from your ‘regulars’, it will be viewed with skepticism by any bank you approach for a business loan.
5. Insufficient Credit
In times of economic recession, banks traditionally increase their credit score criterion, which excludes many businesses that are still reeling from the aftermath of a financial crisis. In most cases, your business will need a minimum credit score of 720 before a bank will even consider you worthy of a small business loan, which is typically very high for emerging businesses.
6. Personal Guarantees
In some cases a personal guarantee from the business owner is mandatory for a loan to be approved, but this also makes them personally liable to pay back the entire loan amount. You could potentially be placing yourself in a perilous position by agreeing to a personal guarantee, especially if you are finding it difficult to stay on top of your business’s current monthly expenses.
7. Inadequate Operating History
Banks usually prefer to grant business loans to establishments with a lengthy and successful track record. However, banks remain skeptical of granting loans to businesses that have remained operational for a while without much success or credibility.
You will have to showcase a proven track record of generating revenue and profits over a specific period of time in order to be considered worthy of a bank loan. Your chances of being approved for a loan without a stable operating history is pretty slim.
8. Economic Concerns
Banks are always looking out for their own interests (no pun intended). They will refuse to loan company money if they feel that their chances of getting back their money in a timely manner in the current economic situation are unfavorable.
This means that small business owners are faced with the almost unrealistic task of maintaining income streams and profit margins even during periods of economic slowdown.
9. Weakening industry
If you are operating in an industry that is experiencing a decline or deemed ‘weak’ by a bank, your application for a small business loan will most likely be declined.
Why Not Consider Alternative Financing?
So, if you are rejected for a bank loan, does it mean that it’s the end of the road for your business in terms of securing extra capital? Of course not.
The emergence and continued success of many alternative funding organizations like Nucleus Finance, has provided many small-medium sized businesses with different finance solutions to help them meet the growing requirements of their business.
It can possibly help your business address its current concerns as well. Get in touch with a reputed lender to find out all the lending options available to your small business.