Nobody likes rejection, whether 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, it is still an arduous task to acquire any credit. The high number of lending options might be making things worse rather than better.
Surveys reported that almost 45% of small business loan appeals had been rejected more than once, and about 23% of them have no idea why. To clear the dilemma, here are the most common reasons that contribute to the rejection of small business loans.
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. Therefore, 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 looking at credit history to minimize their 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, this requires business owners to make smart financial decisions that will eventually lead to higher credit scores.
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 that is approved as 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 when it comes to 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 have to make advance payments to vendors.
If the amount of money going out of your business is more than 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 so that the cash flows improve. Lowering expenses and looking for ways to grow your business are the only ways to improve cash flow and eventually qualify for securing 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. Therefore, predisposition. It does not mean that you have no chance of getting a loan approved, merely suggesting the way banks look at small business loans.
However, small businesses can acquire a loan from other sources such as online lenders and personal contacts if the amount is relative to the size of the company. 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 that recognizes your business can be a blessing, as your chances of approval rise significantly.
Avoiding the possible scenarios mentioned above will ensure that lenders approve your small business loans. Ensure that the applied amount of the loan fits the needs and requirements of your business. Don’t go for a higher amount just for the sake of it. Instead, calculate the exact amount you need to maneuver your business towards its mission.About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks™️ file, critical financial documents, and back-office tools in an efficient and secure environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.