Why Small Business Loans Are Often Rejected

Nobody likes rejection, whether it’s 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. Despite the fact that small businesses have many lending options, it is still an arduous task for them to acquire any type of credit. The high number of lending options might actually be making things worse rather than better.

Surveys reported that almost 45% of small businesses loan appeals have 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 imperative 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 which include late or missed payments on credit cards, loans, vendors or any of the sort. 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 take measures to improve it.

Some small businesses are too new to have any sort of 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.

Lacking Collateral

Banks and other lending associations require a 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 personal assets for the purpose. 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 big risk and must be thoroughly analyzed before advancing. Online lenders are a better option when it comes to securing small business loans without the collateral, however, the interest rates are significantly higher.

Weak Cash Flows

Lenders want to see businesses that have enough money to sustain their daily business operations as well as make monthly loan payments. A healthy cash flow is absolutely 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 into 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. Banks, on the other hand, want to approve larger loans because they are more profitable for them. The cost of processing a $20,000 loan is the same as processing a $1 million loan. Therefore, the predisposition.  It does not mean that you have absolutely no chance of getting a loan approved, merely suggesting the way banks look at small business loans.

Small businesses, however, can acquire a loan from other sources such as online lenders and personal contacts if the amount is relative to the size of the business. 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 raise significantly.

Avoiding the possible scenarios mentioned above will ensure that your small business loans are approved by lenders. Always ensure that the applied amount of the loan is fitting to 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.

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