Starting a business or running a business involves a handsome amount of money that has to be invested in the initial stage. Many entrepreneurs don’t have liquid cash and hence, to ensure the smooth functioning of the business they have to opt for business loans. However, getting approved for a business loan is not that easy and many times, the applicants do face rejection by the banks. Various factors play an important role and because of which the applicants have to face rejection.
Here are the common reasons behind the rejection of business loan application:
Company’s Credit Score
The company’s credit score plays a major role when it comes to availing of a business loan. The credit ratings directly reflect the creditworthiness of a businessman. And, hence banks take into consideration both the scores, that is business credit score as well as personal credit scores.
The credit score includes the financial history of the client, the financial history of the company, tax registration details, tax returns details, business registration details, etc. If the company has defaulted on the loans in past then the same will be reflected on the credit score and it will reduce the score which shall hurt the ratings. Apart from this, the personal credit score also carries an equivalent weightage because if a person cannot handle the personal score, logically he will not be able to manage the company’s credit score either. Hence, a low credit rating or low credit score brings a higher chance of loan rejection for the business.
Having inadequate collateral is one of the major reasons behind loan rejection for small businesses. The lender usually requires the physical property (Collateral) which is provided with a guarantee to them in terms of non-repayment of the loan. But, new or small businesses may not have such collaterals to be offered as a guarantee. Also, many don’t prefer to use their personal assets such as cars, homes etc. as collateral.
However, the sanctioned loan amount is based on the value of the collateral asset.
To get approved for a business loan applicants are expected to provide all the necessary and required information. Also, the lenders ask for documents including company bank account statements, financial statements, contracts, personal and company tax returns, leases, legal documents, business plans etc. Because of the lack of experience, many times, the company is not able to provide accurate, effective and appropriate documents, and this leads to the rejection of the loan application. The lenders prefer to provide the loan to the prospective borrowers and hence, they would want the paperwork, documentation, and business plan to be up to the mark.
Lack of adequate cash flow
The lenders always look at the cash flow which is being earned by the businesses before they decide to approve the loan. Understandably, small and new businesses often struggle with the problem of the cash flow, as the same is not too consistent or maybe adequate to fulfil the loan requirement. By keeping an eye on the cash flow, the lender assesses the repayment ability of the borrower. The poor or inadequate cash flow may lead to the failure of the business and the lender would never want to lose the money by opting for the wrong deal. So, there are high chances of loan rejection. Hence, small businesses need to manage funding and cash smartly. This helps to sharpen the management and accounting skills in a better manner.
Small loan amount
Most of the small businesses are opting for the small loan amount as they do not have a too high need for cash. The small businesses are easily manageable with lower funding. However, for the lenders, the lower loan amount is not profit earning when compared to the expected return. The lenders want to go for underwriting the larger amount of loan as it is more profitable for them. Hence, the borrowers need to assess and evaluate all the needed aspects of the business and put the projection according to which they can apply for the loan.
Business established in a risky industry
There are few industries in which there are always high chances as far as failure is concerned. For example, if an entrepreneur wants to open up a stock broking company, the business will always be dependent on the market fluctuations. Hence, the lender may not want to provide the loan to the businessman.
As you can see there are several reasons which can lead to the rejection of small business loans. However, it is important to know that careful assessment and a proper loan application may lead to the approval for the same.