If you’ve been anticipating a business loan, being refused might be disheartening. If you’ve been in business long enough, you know it occurs to many small company owners.
Knowing why lenders reject loan applications might improve your chances of acceptance. We’ve listed seven potential causes of business finance refusal and their rapid remedies.
1. Credit Issues
Poor credit ratings or no credit history are the main reasons firms are denied business finance. Banks and other lenders use credit ratings to assess your creditworthiness, or likelihood of repaying them. Poor credit scores (below 650) may cause lenders to refuse company loans.
Many variables affect your credit score. A recent bankruptcy may lower your score. Loan defaults and late payments are similar. These give lenders the idea that you can’t manage your funds, which hurts your borrower image.
Here are some ways to improve your credit score if it was the major reason your loan application was refused.
- Before the deadline, pay your debts.
- Work with suppliers or lenders that report to the main credit bureaus.
- Regularly check your credit record and submit errors to the credit bureau.
Poor credit firms may qualify for funding from certain lenders. They may charge more interest to reduce risk.
2. Poor Cash Flow
Your company’ cash flow is just as crucial as your credit score when asking for a loan. If your organization often has revenue shortfalls, this may be a problem. That anomaly may cause lenders to reject applications.
Cash flow issues kill many small firms, lenders know. Thus, cash flow must be monitored. Make sure there’s more coming in than going out (most of the year). Investing in solid accounting software may help you collect payments from late-paying clients, which can damage your cash flow.
3. Credit Utilization Too High or Low
The ratio of credit utilized to credit available is your credit usage rate. With a high credit usage rate, lenders will think there won’t be enough cash to fulfill the new financial obligation. Small company lenders may also be concerned about low loan use, which may indicate poor debt management.
Business finance applicants should strive for a credit usage rate of 30% or less. You must maintain your credit card balances below $30,000 if you have a $100,000 credit limit.
If you have a high credit use rate, you may pay off credit card debt. Closing credit card accounts may also lower your credit limit, raising your credit usage rate. Even after paying off your credit card debt, leave the account open.
4. Insufficient Collateral
Small enterprises may be required to pledge collateral to get loans from banks. Commercial real estate, equipment, or other important corporate assets may be involved. Unfortunately, most small firms may not have enough assets on their financial sheets to support the application. They’re regularly denied business financing. If the lender doesn’t value your assets, it will be tougher to get a business loan from banks.
If this happens, seek alternative financing options. For instance, invoice finance allows you utilize your customers’ unpaid bills to get funds. Small company entrepreneurs without significant assets may qualify for unsecured business lines of credit from other lenders. Until you have adequate collateral for a larger company loan, you may use these methods.
5. Brief Business History
Lenders usually want two years of company history before issuing business loans. Lenders can’t assess such firms’ loan repayment capabilities since they don’t have adequate credit or profitability history.
Due to their lack of company history, startups are often denied business finance. They have more choices today. Startups may get startup funding from alternative lenders. A higher interest rate is the sole drawback. However, it’s a realistic choice if your firm needs more finance but hasn’t been in operation long enough to qualify for bigger loans.
6. Dangerous Sector
Traditional lenders may see certain sectors as risky. Due to seasonality and high failure rates, service-based enterprises like restaurants and construction are high-risk. Due to shifting restrictions, conventional banks may not finance gambling or CBD companies.
That doesn’t mean such enterprises can’t get finance. Your industry’s specialty lenders can finance your high-risk firm. You may acquire better financing conditions and boost your chances of acceptance.
7. Documents Missing
If you don’t present the proper documentation, you’ll likely be denied company finance. These papers prove your creditworthiness and convince lenders to approve your loan application. Lenders can’t verify your identity without the right paperwork.
Keep a record of lender requirements for your next application. In addition to company leases, registrations, IDs, bank statements, and tax returns, you’ll need to prepare:
- Financial reports
- Account balances
- Earnings and losses
- Forecasting cash flow
- Articles of incorporation
- Commercial agreements
If you’re unsure what paperwork to prepare, phone the lenders and ask.
Final Thoughts
Applying for company funding isn’t easy. It’s frustrating to be rejected. By knowing the most prevalent causes for business funding rejection, you may boost your chances of acceptance.
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