Lenders generally look at very matter-of-fact figures when analyzing whether to approve or reject a business loan application. Always make sure to choose lenders who operate within the legal limits likes banks and approved financial institutions.
Here are some of the main reasons why lenders reject your business loan application,
Credit History
A strong credit history is a non-negotiable to banks. Without a good personal and business credit score, your chances of securing a business loan from a traditional bank go from small to virtually nonexistent. Lenders will look into both your personal and business credit history. On average, banks like to see a good personal credit score. Also a history of strong money management skills, such as effective management of the business budget and/or personal finances.
Losses on Tax Return
Showing profit is important in general, but it’s especially important for banks and lenders. In the beginning, many businesses opt to maximize deductions. However, there is a high likelihood that a bank will reject a loan application if the business doesn’t show a net profit.
Lack of Current Cash Flow
Lenders fear that a business will focus on paying off expenses rather than paying off a loan, so lack of cash flow is a red flag. Lenders tend to view a negative cash flow as a representation of a business’s health. A lack of current cash flow indicates a poor repayment ability of the business. Eventually, rejecting the business loan application.
Insufficient Collateral
Traditional lenders prefer to work with businesses that have collateral because if the business defaults on the loan, the bank can acquire the collateral and sell it to recoup the loss. This is another catch-22, though.
Learn More : 5 Signs to Find If Bottom Line Is Good for Your Business
On the one hand, lenders require new businesses to provide collateral when applying for business loans. The problem is that startups usually don’t have collateral such as vehicles, real estate, investments, or business equipment. If serving up your business or home as collateral scares you, choose an option to get a loan without collateral.
Customer Base
Lenders like to grant loans to industries they consider stable. If they view your customers as a targeted niche, they may reject your business loan application. Generally, they prefer to work with a business that has a diversified portfolio of clients and stable markets.
Alternatives after Reject Business Loan Application
Ok, so you fall into one (or all) of the categories mentioned above. Does that mean you should give up, call it quits! Absolutely not. While traditional lenders may make you feel like your business isn’t worthy of their trust, there are other options.
Read More : How to Borrow Money from P2P Lending Platforms?
Alternative lenders such as other businesses you may or may not work with. For example, the business you purchase your machines or services might offer you EMI or deferred payments. You can also choose to ask family and friends. You can also simply wait to review your business health and approach for loans again. Try equity funding, crowdfunding or other creative ways to raise funds for your business. If all else fails, remember to bootstrap a little longer! rather than going desperately after a loan.
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