Nobody wants to be turned down, regardless of whether the rejection is from a potential employer or the bank. Many small business owners know how it feels to be told ‘no’ repeatedly. A relatively small percentage of small businesses that apply for financing are able to receive an amount. This worrying trend has made it necessary to delve into the issue of small business owners being turned down by banks when they need loans.
- Lending money to small businesses is typically regarded as a risky undertaking for banks. Many banks have opted to raise their lending standards since the financial crisis occurred. Higher lending standards enable banks to avoid such risks.
- After the recession, more banks became reluctant to take on the risk of small business loans. These types of loans are naturally riskier than consumer loans and large business loans.
- A number of small business owners find it easier to get loans from banks that they have established relationships with. Being known by bankers increases the possibility of favorable results for some small business owners.
Many small businesses seek small loans and banks prefer larger loans that are more profitable. It costs similar amounts to process both small and large loans but a bank is able to make more money when underwriting larger loans. While it can be challenging for a small business owner to get a loan from the bank, a number of online lenders offer small loans that conventional banks are not likely to underwrite.
Lack of Awareness
Some small businesses are turned down for loans due to the owners not being prepared. Many businesses are not familiar with application processes and think they can get into banks, fill out applications and emerge with loans.
Before a business applies for a loan, it is essential to have a clear business plan, financial projections or statements, business and personal credit reports, bank statements and tax returns. Businesses are also required to have copies of legal documents such as permits and licenses, leases, contracts and articles of corporation.
Cash Flow Problems
- Banks need to be able to see that a business has sufficient money to make loan payments on a monthly basis along with the ability to cover inventory, payroll, rent and other expenses.
- Several small businesses find it difficult to retain enough money in the bank, including those that are profitable. This is because they often have to make upfront payments to third-party suppliers before they are paid for goods or services.
- Small business owners should know the amount of money that flows through operations. When the amount of money going out exceeds the amount coming in, changes are necessary.
- If your business is financially challenged, consider working towards reducing expenses or identifying ways to increase revenue before making loan applications.
- While cash flow may be a major challenge for various small businesses, some are witnessing improvement.
Lack of Security
Businesses usually require collateral, which refers to tangible property that can be used to guarantee a loan in case it is not repaid. New small businesses may not be able to offer real estate or equipment as collateral. Businesses that do not own property that is considered to be valuable will find it harder to secure a bank loan. Credit scores are indications of creditworthiness.
No Credit or Bad Credit
Banks typically look at business and personal credit scores that determine their lending decisions and interest rates. The main reasons business owners are turned down when they apply for loans are a low credit score or not having a credit history.