Why Banks Decline Business Loan Requests
Getting frustrated with banks turning down your small business loan applications? Here are some of the top reasons you may be having difficulty getting a loan.
#1) You Are Trying to Start a Business:
With an early stage start-up it is difficult to get your bank loan approved, because at this stage your business is more of an idea than a business. It’s a tough position to be in because your company has no track record for banks to look at and little cash flow.
#2) Your Business is Too Young:
Businesses younger than 12 months often have a harder time being approved for a loan than established businesses. The newer the business, the less information there is for the banks to analyze. With less information, and most likely less revenue, you will have to settle for a small loan if you get approved at all. Smaller loans (the type sought after by small businesses) does not benefit the bank nearly as much as larger loans that well-established businesses would qualify for.
#3) Low Personal Credit Score:
One of the most obvious reasons to have your loan application declined is having a low personal credit score. A low credit score reflects badly on you and your business. It indicates an unwillingness, or inability to repay debts, and will make any lender wary of approving your business loan application. Learn more about personal credit scores here.
#4) No Business Credit Score:
Many new businesses do not yet have a business credit score; most owners will operate off of personal credit alone. This is where your personal credit score can be extremely important. It is also the reason you need to build your business’s credit score, even if it is by using small loans to show that the business is credit worthy. Learn more about building your business credit score here.
#5) Lack of Collateral:
Bank loans will often require you to put up collateral before they give you a loan. These could be personal or business assets, such as property, that the bank could take if the loan is not repaid. However, many small business owners may not have enough collateral or be willing to put up their personal assets.
#6) Sloppy Bookkeeping:
Having unorganized financial records reflects poorly upon both you and your business. Banks will be looking at financial statements, bank statements, and any other accounting information you have. If you are unorganized in this area it will appear as though you do not care about your finances, or are not organized enough to keep track of everything, both of which are red flags. If this is a problem for you then it may be time to hire a bookkeeper or accountant.
#7) Little Or No Positive Cash Flow:
One of the biggest things banks look for is positive cash flow, which shows you have the capacity to carry the loan. If your business does not have this, then you will have difficulty being approved for a loan because it will appear as too much of a risk to the bank. Learn how to improve your cash flow here.
#8) Undocumented Capital Expenditures:
Capital expenditures that go undocumented will negatively affect the analysis of your business because it will seem as though you are making less money than you actually are. Positive cash flow is important when banks and lenders review your business, so by recording these expenditures your application will show the true health of your business.
#9) Tax Issues
Banks look to make sure you have filed and paid your taxes on time. If you haven't, then it will raise red flags in the analysis because it could mean you could have trouble paying back a loan.
#10) How You Pay Yourself:
As a business owner you are usually the last to be paid, and these payments may occur sporadically and with inconsistent amounts. Paying yourself in this manner skews the financial analysis by making it appear as though your company is not generating enough revenue on a consistent basis, when it really is. You should do your best to pay yourself the same amount at the same time each month.
There Are Other Options For Your Business
If you are mindful of what the bank considers and prepare your business accordingly you can position yourself to get approved for a bank loan. However, there are now more choices for small businesses that aren't nearly as strict, time-consuming, or collateral focused.
An online business loan, such as those offered by Lendified, allow you to access fast and affordable capital without specific collateral. It can also help you grow your business and credit so you can qualify for bank loans. If you are interested in learning more we encourage you to check out our Ultimate Guide to Small Business Loans. Or if you're ready for funding now, get a free quote from us.
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About the Author
Lendified is Canada's premier online lender for small businesses. The company was founded by former bank executives dedicated to provide businesses with fast, easy, and affordable financing. The Lendified team regularly produces blogs and guides to help small business owners succeed.