Nobody likes rejection from someone you love, a job interview, or a bank loan. As a small business owner, the feeling is relatable as only half of all small business loans are approved. Even though small businesses have many lending options, acquiring any credit is still an arduous task. The high number of lending options might make things worse rather than better.
Surveys reported that almost 45% of small business loan appeals had been rejected more than once, and about 23% have no idea why. Here are the most common reasons for small business loans to be rejected.
Bad Credit Scores and Financial History
A credit score is one of the most critical measures of a person’s creditworthiness. Banks heavily rely on credit scores to make decisions regarding approval. They set interest rates accordingly. Credit bureaus are responsible for keeping track of credit scores. A bad credit score is often due to several reasons, including late or missed payments on credit cards, loans, vendors, etc. Banks will approve small business loans after reviewing credit history to minimize risk. If your business has a bad credit score for any reason, you should immediately improve it.
Some small businesses are too new to have any credit history. Such a situation is harmful when it comes to scoring a loan. To elevate their personal and business credit scores, business owners must make payments on time, spend well under their credit limit, and keep their credit accounts open. However, business owners must make intelligent financial decisions, which will eventually lead to higher credit scores.
Lacking Collateral
Banks and other lending associations require collateral, typically a fixed asset such as property, to guarantee that the loan is repaid. A start-up venture often does not have resources to put up as collateral and might not be willing to risk their assets. The amount approved for the loan is equivalent to the value of the collateral.
Homes and cars are the most popular options for collateral among new businesses. However, that can be a significant risk and must be thoroughly analyzed before advancing. Online lenders are a better option for securing small business loans without collateral. However, interest rates are significantly higher.
Weak Cash Flows
Lenders want to see businesses with enough money to sustain their daily business operations and make monthly loan payments. Healthy cash flow is vital for the survival of any business, and lenders know that. However, small businesses often struggle to keep a steady balance in their bank accounts because they must make advance payments to vendors.
If the amount of money going out of your business exceeds what’s coming in, it can be hard to acquire a small business loan. Business owners need to implement changes in their current business model to improve the cash flow. Lowering expenses and looking for ways to grow your business are the only ways to improve cash flow and eventually qualify for a loan.
Pursuing Small Business Loans
Small businesses often look for loans that amount to less than $100,000. On the other hand, banks want to approve larger loans because they are more profitable for them. The cost of processing a $20,000 loan is the same as preparing a $1 million loan. It does not mean you cannot get a loan approved; it merely suggests how banks look at small business loans.
However, if the amount is relative to the company’s size, small businesses can acquire a loan from other sources, such as online lenders and personal contacts. You also have a better chance of getting a loan approved from a community bank, provided you have good relations with them. Having a banker who recognizes your business can be a blessing as your chances of approval rise significantly.
To increase your chances of getting approved for small business loans, it’s important to avoid the scenarios mentioned above. Make sure that the amount you apply for fits the specific needs and requirements of your business. Avoid applying for a higher amount than necessary just for the sake of it. Instead, calculate the exact amount that you need to move your business forward in achieving its goals.
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