Most Common Reasons small business Loans are Denied
Understanding the most common reasons why loans are denied can also help to secure a small business loan. Realistically, there are many reasons why a small business loans application may not succeed in the loan process, despite undertaking significant research. It is at the discretion of the lending institution whether to grant a loan or not. Above all, as mentioned at the start of this guide, be clear why you need the small business loans and what you intend to use the funds for. According to James Walter, the founder of loan platform BBC Easy –
“In my prior experience as the co-founder of a lending company, one of the most basic errors made by loan applicants was not telling me why their company needs the money. And they wouldn’t reveal why we should approve the loan even though their company doesn’t meet our minimum standards”
Lack of collateral is another significant reason that small business loans are denied funding. While this is not a problem for larger institutions, it can present difficulties for startups. Without collateral, lending institutions have little recourse in the event of bankruptcy.
Another factor that may hurt your loan application is whether or not you have outstanding loans with other lenders. If a bank discovers that you have debt from other lenders, they will be less likely to do business with you. This can be a problem for small and medium business owners, who typically seek multiple streams of credit with many different loan outlets.
Customer concentrations are another item to be considered in the loan application process. Ideally, you would have a large number of orders from a wide base of customers. Lending institutions might look disfavorably upon large orders from a select few customers. This is because if these customers were to take their business elsewhere, then your business would be affected disproportionately. It is indicative of a centralized business model and a decentralized customer base is generally regarded as being more robust.
Other Reasons for a Small business Loans Application Rejection
Having an insufficient management team can also serve to hinder a small business loans application. Banks will often reject small and medium business enterprises that do not possess strong management skills. There has to be a noticeable chain of command within the organization. Another thing to remember is that businesses without a checking account have a decreased chance of success.
Lastly, several concerns are outside of the control of the small business loans applicant. Banks and lending institutions need to make a profit. If the economy takes a bad turn or the industry you are involved in does not have bright prospects for the immediate future, then your application will be refused. This is more likely to be the case with banks as opposed to online lenders.
Alternative Resources and Financing Options for Small business Loans
Aside from getting the standard small business loans from an alternative lender or a bank, there are several options available. You could consider some of the loans mentioned above, such as the merchant cash advance, the business line of credit, equipment financing, invoice factoring, and invoice discounting. All of these offer unique benefits that are different from the typical term loans available from lending companies and banks.
There are many options available aside from the standard SBA which you could potentially investigate. These include the small loan program, the community advantage program, of the capelin program.
There are also multiple grant programs available globally. Getting a loan is great, but getting a grant is even better. If you are an African American business owner or from a disadvantaged group, then you might be eligible for a small business loans. The same applies to female applicants. However, it is worth bearing in mind that women and disempowered groups tend to have a harder time obtaining finance. Whether this is due to lending criteria or cognitive biases is not yet known. Top business grants for women and minorities include:
- The Eileen Fisher Women-Owned Business Grant Program
- SBA InnovateHER Challenge
- Zions Bank Smart Women Grants
- FedEx Small Business Grant Contest
- The Amber Grant for Women
- The Halstead Grant
Another strategy that you might consider is going local. If you are lacking collateral for a long-term business loan, then it is highly unlikely that your loan application is going to be successful. But there are local options available that can increase your chances. Alternatively, there are local peer-to-peer platforms where you can get a loan no matter where you are in the world or what your credit rating happens to be. These platforms can help you to secure a loan easily once you satisfy some basic criteria.
A business credit card is another good way to acquire flexible cash where you only pay interest on when you need it. This has an added advantage in that you will be building good credit when using this card to get better loans in the future. You can also benefit from rewards or points-based system and prioritize aggressive repayments so credit score ratings shoot rapidly upwards.
The Simple Checklist
While there are many variants of lenders and kinds of loan, there is a simple formula that you can consider to improve a loan application:
- Understand your credit score and increase it as much as possible.
- Organize your finances – This means having one business checking account that is separate from everything else.
- Make sure there is a regular and consistent activity where possible.
- Be diligent with invoicing and financial tracking.
- Develop a clear map of what you need the money for and how it will be spent.
- Have a solid business plan.
The best strategy could be to secure a loan with an alternative lender such as FUTIRE LOANS (IOM) LIMITED. We can offer you a loan with for 6 months to a year. In the meantime, you will be building a credit score, increasing your revenue, gathering documentation, and building your case for an SBA loan. It is a good compromise that gives you the best of both worlds.
The time it takes to prepare, organize, and process a loan from a bank is often not factored into the equation. This is frequently quite stressful. Moreover, time is money, and it may be easier to take a loan with a higher APR and make back the finances in other ways than to undergo a strenuous loan procedure.
Getting a business loan is vital for the success of any business. Every business owner runs into unforeseen expenses or stumbles across a golden opportunity without the finances to capitalize.
Be proactive with your loan application process right now. Build a strong credit score, increase your annual revenue, and start planning for either an SBA(7)(a) application or an alternative lender. Put simply, the more financially efficient your business is, the lower the rates will be. The flexibility and general conditions of the loan will also be better.
Remember, you don’t have to get the perfect loan starting. You need to get a good loan now and build for the future so you can get better loans later. The most common trait found among people that understand money is patience. Provided that no mistakes are made, businesses tend to grow and finances tend to gain interest and accrue.
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