When you want to expand your business a loan can be very instrumental in the business operations. However, it’s not always easy to secure a loan and for business with no prior experience, it can be very frustrating.
Most banks will write to you and explain why your business wasn’t funded but it’s also possible to have cases where people have no idea why. Although there are several alternatives for business loans, some startups are rejected more than once before a breakthrough. While it’s easy to give up, the best move is to find out the reasons for the rejections and fix them.
In this article, you will learn the common reasons why lenders reject an application.
Insufficient cash flow
Cash flow is among the first indicators of a healthy business. Before a lender approves some funds for your business, they need to be sure you can comfortably pay the money. They will look at the ability to meet the recurrent expenses and how much is left after all bills are paid. In addition, you need to have some money left to act as a cushion on a rainy day.
Lenders understand that the main cause of business failure is financial difficulties. Therefore, the slightest indication of inadequate cash flows will lead to a rejection. The best move is ensuring your financial planning skills are top notch and try to have weekly reports to inform your financial decisions. Similarly, avoiding unnecessary expenses and timely invoices will work well if combined with some emergency savings.
Lack of collateral
Normally, traditional just right loans lenders are very keen on the collateral listed for the loan. This is their assurance that the money will be recovered if the business is not in a position to pay. To make sure you are on the safe side, list several assets that you can comfortably use as collateral. If the business doesn’t have sufficient assets, you may have to offer personal property. Remember that lenders will reject a loan application if the assets listed do not match the loan amount.
The credit scores need some attention
If you are not well informed about your personal credit score, chances are that you don’t know your current creditworthiness. Banks will take a look at your credit score and use that in decision making. Normally, a bad credit score implies that you can’t be trusted to manage a loan even if the business is several years old.
To repair your credit score, maintain a low debt profile and make regular payments towards your debts. It’s also important to keep your active credit accounts open.
The business is relatively new and lacks the necessary expertise to survive
While it is possible to get a new startup funded, most lenders are looking for a good history and industry knowledge. Another factor that comes with new businesses is the absence of sufficient credit history that can guarantee the approval. Because some suppliers will not make regular credit reports, ensure that your accounts are reported and build a good credit history.
Most startups can easily succeed in getting funds from alternative sources that are friendly to new businesses.
The business plan is not convincing
A business plan indicates where the business is going as well as the current situation. Because a business plan is an integral factor in the approval process, a solid document will work towards your favor. Before submitting the business plan, make sure it is updated and professionally written. This will prove that you have conducted necessary market research and realistic profit estimates.
Your business is already in debt
When lenders realize that either you or the business has outstanding debts, they will be cautious before giving additional credit. High debt utilization is a red flag and it creates uncertainty in your ability to service the debt. Try to make regular payments to pay the debts or negotiate with the providers so that you can pay the debt early. If you have lines of credit, keep the balances low so that you won’t appear to be overstretched.
The intended use of the funds is misplaced
If the money will be used to purchase unnecessary assets, it’s obvious that most lenders will reject the application. The money should be used towards expenses that will lead to significant growth of the business. A lender wants the business to grow and be in a position to make payments with ease. If they see that funds will be spent on non-essential items, they know cash flow problems are likely to follow.
The business environment is risky
Some businesses are considered risky when the cost of inputs is rising. Generally, it’s likely that the volatile business environment will affect profitability which in turn affects the ability to make payments. Be keen on the industry trends to determine whether to submit an application or to seek alternative funding.
Loan applications can be very demanding and success will only come when all requirements are met. Before making any submission, look at each requirement and ensure that everything is neatly done. Sometimes it’s good to ask for all requirements before starting the application process.