The Key Reasons Banks Turn Down Small Business Loans
Over the last several years, large banks have been reducing the amount of loans that they issue to small businesses.
The WS-J reports that it may be because of, “Weak demand, tighter lending standards and high costs have put a lid on small business borrowing” following the Y 2008 economic crisis.
Getting rejected for a loan to expand your small business is not heartful, even if the circumstances are beyond your control.
It is Key that you learn exactly why your loan was rejected in the 1st place so that you can make sure that it does not happen again.
Often banks do not share that information with applicants, but sometimes a bank willshare these details, but if not, the typical reasons for a turn down is for 1 or more of 5 reasons, as follows:
- Bad credit: Credit history is one of the first things that lenders will review when going over a business loan application. A good credit score proves that the business owner has properly managed both of their personal and business finances by avoiding bankruptcy and making all of their payments on-time. A poor credit score, however, can make lenders wary since it demonstrates that the individual can not make well-informed financial decisions and are unable to meet the financial obligations that are included in the loan agreement. This is even the number one reason why a payment processor like myself will reject you and your company from even accepting payments.
The good news is that you can repair your low credit score by paying your bills ontime, getting your credit card balances under control, and repairing any mistakes that appear on credit reports. Keep in mind, bad credit on either the business owner or the business can impact the business getting a loan.
- Weak cash flow: Banks are very concerned that businesses have enough cash flow to make monthly loan payments in addition to covering their payroll, inventory, rent and other expenses. Unfortunately, many startups and small businesses struggle to keep enough money in their bank accounts even when they’re profitable, often because they have to pay 3rd-party suppliers upfront before they get paid for their product or service. By creating a sticking to a budget, small business owners will have a better idea on how much cash is coming and going through your business operations. If you notice that there is a weak cash flow then you need to cut expenses and find ways to bring-in some extra so that banks will not reject your application.
- Time in business and limited collateral: For new small business owners, obtaining a bank loan may seem like one of the best ways to jump-start your business, or at least get you through your 1st trying year. Loans for those situations do exist. But, you will not find them at your local bank. If you are looking for a traditional simple interest business loan with a monthly payment you’re going to need to be in business for at least 2 years. You may even have difficulty qualifying for this type of loan until you have been operating for at least 3 years. Why? Traditional loans require 2 full years of tax returns to prove consistent gross and net profits. Additionally, small businesses that are just starting out often do not have the collateral, such as equipment or real estate, required if your business ever defaults on the loan. You may have to look for alternative sources of funding, such as peer-to-peer lenders, crowdfunding, or online merchants, if you just started your business. I like crowdfunding best, as it is in the gifting not lending spirit.
4. Lack of preparation: Many businesses simply aren’t savvy about the application process and believe they can walk into a bank, fill out an application and get approved for a loan. Prior to applying for a bank loan, the Small Business Administration (SBA) suggests that you have a written business plan, financial statements or projections, personal and business credit reports, tax returns, and bank statements. Also included should be copies of legal documents, which include articles of incorporation, contracts, leases, or any licenses and permits that you need for your business to operate.
5. Outside conditions: What if you have a solid credit score, strong cash flow, collateral and have prepared everything you need for loan, but are still turned down? It could be no fault of your own. It may just be outside conditions that are out of your control. Outside influences are always considered prior to a loan approval or decline. They can include industry experience as do you have the work background to manage your own business, a business’s location, local or regional economic trends, competitors. Also, there are local, state, and federal ordinances, along with factors like, such as local climate conditions, that could influence an applicant’s approval or denial.
Banks are more cautious since the Y 2008 recession, in part because of the Obama Administration’s imposed no growth regulations about lending money to businesses that are considered risks. Unfortunately, this includes small businesses since they do not have the proven track record of established or larger businesses.
But now that Obama is out, and Donald Trump will be installed as our new President on January 20, business optimism is running high, a new SBA administrator will be installed, the no growth regulations will fall, small business opportunity will begin to flourish once again, America First.
Have a terrific week.
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