Nobody likes rejection from someone you love, a job interview, or a bank loan. 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 for them to acquire any credit. The high number of lending options might make things worse rather than better.
Surveys reported that almost 45% of small business loan appeals have been rejected more than once, and about 23% have no idea why. To clear the dilemma, here are the most common reasons contributing 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, 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 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, business owners must make intelligent financial decisions, eventually leading 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 its assets for the purpose. The amount 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 for securing small business loans without collateral. However, the interest rates are significantly higher.
Weak Cash Flows
Lenders want to see businesses with enough money to sustain their daily operations and make monthly loan payments. A healthy cash flow is vital for the survival of any business, and lenders know that. However, small businesses often need help 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 is coming in, it can be hard to acquire a small business loan. Business owners must implement changes to their current business model to improve cash flows. 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. The cost of processing a $20,000 loan is the same as processing a $1 million loan. Therefore, the predisposition. It does not mean you have no chance of getting a loan approved; it merely suggests how 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 who recognizes your business can be a blessing as your chances of approval rise significantly.
Avoiding the scenarios mentioned above will ensure lenders approve your small business loans. Always ensure that the applied amount of the loan fits the needs and requirements of your business. Do not go for a higher amount just for the sake of it. Instead, calculate the amount you need to maneuver your business toward its mission.
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