Tired of No? The Five Reasons You Can’t Get a Business Bank Loan
Any business expansion requires a financial boost, especially for small businesses. It is impossible to run the business entirely from your finances. Getting financing is a challenge for most entrepreneurs. Many know too well the pain of rejection. There are many reasons that businesses fail to secure funding from the banks. Here are some:
No or Bad credit reports
A credit score is one of the primary determinants for a lender too make the crucial decision of whether or not to lend you money, and at what rates. It shows your credit worth. Various credit bureau reports give individuals and businesses multiple credit scores as they all use different methods to calculate.
Some of the reasons that lead to low credit scores include, but not limited to, missed or late payments to lenders, credit card vendors, credit card issuers, bankruptcy among others. New businesses may not have established a credit history though. Banks also increased the credit score standards during the recession making it harder for small businesses to secure loans.
Businesses and individuals can raise credit scores by spending under the credit limit, timely payments, and keep credit lines open.
Weak cash flow
Lenders favor businesses that demonstrate the ability to pay through a steady revenue stream. Companies that are struggling to make rent, inventory, payroll payments, may struggle to pay the loan. For small businesses, keeping reasonable cash lying in the bank is a tall order, even when making profits.
To increase the chances of getting business loans, a business owner should ensure that more money is coming into the business than that going out. Find a way of growing revenue while keeping the expenses on the minimal before applying for a loan. As a business person, understand your operations and be keen on the flow of money.
Before lending, banks require some form of security. Collateral is either equipment or property valuable enough to compensate the bank should you default the payment.
In the case of collateral, the amount the lender gives depends on the security value. Most ventures use cars and property as collateral, hence the most common. Without such assets, banks hardly consider lending any business money as the risks involved are so high. Small businesses may find it hard to get funding from the banks as they are yet to acquire anything the bank deems valuable enough to secure a loan.
Getting a loan approval is a process that requires thorough prior preparation and involves a lot of paperwork. It is more than walking into a bank and filling the application. A business needs financial statements or projections, business and personal credit reports, written business plan, bank statements, and tax returns. Other documents required are articles of incorporation, leases, contracts, operating license, permits, and any other relevant documents for operation.
Without these documents, the bank will deny a business funding. Before applying for a loan, you should ensure that you have all the papers in place and up to date.
Banks are in business too, and although the process of getting a loan is tedious, they want to maximize the interests and profits of the few that qualify. According to a Havard School of Business research in 2014, most startups seek less than $100,000 loans. It is more profitable for banks to underwrite large loans as they are earning more from them compared to small ones.
A business may be forced to check alternative lenders, other than banks, for small loans. Lending Club, OnDeck, and Dealstruck offer enterprises to the small fundings alternative.
If you are tired of banks saying no to your loan requests, you can consider other options or work on the factors mentioned above. To get one of the most established company’s backing helps you get funding. This is because the company takes responsibility in case of a liability. Some lenders file for IPOs to get the funding, as an alternative to bank loans.