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Reasons Why Banks Generally Turn Down Small-Businesses for Loans


FindItMore | Small business owners often face the challenges of getting business loans from banks for their companies. It became even more challenging post-recession a couple of years ago. If you are a business owner and have been counting on a bank loan for funding your business with the latter saying “no” you are not the only small business that has got no for an answer.

Are banks against small business owners?

In the last few years, major banks have not been issuing loans to most small business houses. There are several reasons for reducing these loans- they are generally because of stringent standards of lending, weak demand and high expenses incurred on small business lending. However, having your small business loan refused is not good news. It is here you should know why your loan was not approved in the first place. This post will cover the most common reasons why small business owners are not offered loans from banks-

  1. Bad credit- One of the biggest reasons why banks refuse to provide small businesses with loans is bad credit. Banks will first review the credit history of the lender. If the credit history of the business owner is good, this means that he or she has managed the business and personal finances properly and averted bankruptcy. This means he or she makes credit payments on time. Now, if the credit score is poor, lenders become wary as this means the individual did not make informed financial choices and was not able to meet all the financial obligations in the loan agreement. This is a reason why banks generally reject loan applications from small business owners. However, the above does not mean that you cannot repair your credit score at all. Here, you need to repay all your bills in time so that your credit balance gets in order. This does not mean you have to cancel your credit card. You just have to repair the mistakes that you have made on your credit reports. Bad credit really impacts the business from getting loans from banks and other sources if you are not careful. Repay your bills on time so that you can fix your credit score and then apply for the loan.
  2. Poor cash flow- Banks are worried about businesses not having sufficient cash flow to make payments every month. They struggle with buying inventory, rent, payroll and other costs related to running the business. The sad news is many small businesses, and startup companies struggle to keep money in their accounts even when they enjoy profits. They often need to make payments to third parties for their service or product. The solution here is to stick to a monthly budget. Small business owners know from where they are getting cash better. They need to manage their cash flow better and reduce costs. They need to find ways and means via which they can bring in extra money so that banks do not reject your loan application.
  3. Business history and collateral- an Esteemed company in the field of money lending to businesses, libertylending says getting hold of a bank loan is undoubtedly one of the best ways to begin your business or at least conduct business in the first year. However, banks do not think along the same lines. This means if you are looking for a small business loan for a bank, you need to be in business for at least two years. You will face a unique struggle to qualify for this loan even if you have been in business operations for three years. The reason being traditional bank loans need the tax returns for the past two years to prove you have enjoyed consistent net and gross profits. Besides the above, small businesses that have just begun do not have the collateral for the loan like real estate or equipment. They are needed in case you default on the loan taken. It is here you need to look for alternate sources for getting loans for your business. You may apply for loans from crowdfunding sources, online merchants, peer-to-peer lenders, etc. Here, you may use your personal asset like a home or car for the collateral.
  4. No preparation- Small business owners generally lack the knowledge of the application process when it comes to bank loans. They just think they can walk in a bank and fill a loan application form to get it approved. It is not that simple. You must be aware of and educated on how to apply for a bank loan in the correct way. In order to apply for a bank loan, you must have a proper business plan, financial statements, bank statements, credit reports and more. You should have all the copies of your legal documents ready like leases, contracts, permits and other licenses. The above will help you with your business operations.
  5. Other factors- There are times when you have everything in order when it comes to small business loan applications. You may have a good credit history; you may have a solid business plan, you have collected all the legal documents for your business however you still get rejected for the business loans. Experts in the field say several external factors play a vital role in the decline or the approval of the loan. They cannot be foreseen beforehand. You just have to seek other sources of funding your business in case your small business loan was not approved because of the above reasons.

Therefore, when it comes to small business loan applications, the above reasons are the main causes of decline. You do not have to feel bad as this is common for all small business owners, especially after the economic recession, took place a couple of years ago. Banks have become more cautious. However, the good news is there are other money lending sources you can resort to like private money lenders, crowdsourcing, etc. They accept applications from small business owners and largely help you to finance your business.

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