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Reasons Why Banks Refuse Loan Applications of Small Businesses!

Photo by Jimi Filipovski on Unsplash

Small businesses are coming up daily in the market. Some are new startups that have an idea or concept that seems promising for the present market. However, every small business faces the challenges of funds, and so they apply for loans to financial establishments and banks. When it comes to money lending by banks to small businesses, they often find their applications getting rejected. Some banks simply refuse to accept applications from small businesses. Now the question that crops up in your mind is – our banks against small businesses? Why?

What do industry experts say?

Do you remember the 2008 recession? This economic meltdown was a bad phase for the nation and ever since banks are cautious when it comes to money lending matters. Some experts say that banks lend money to those businesses that actually do not need a loan. In fact, if you are a small business owner, applying for a bank loan means you will be refused. Banks do not want to take risks anymore, and so even if you have a great credit score, all your financial papers intact and legal papers in order, you still will be refused. The only alternative here is to seek other sources of money lending that are focused on small business owners like you.

Given below are some of the key reasons why banks do not accept loan applications for small businesses:

  • Credit score – Yes, bad credit is the first reason why banks back out when it comes to approving your small business loan. The first thing that banks do when it comes to any loan application is they review the credit score of the applicant. If you are a small business owner and have a good credit standing making all your bill payments on time, there are chances that your loan application will not be approved. The bank will look at the history of your business and its cash flow as well. This means credit score alone will not get through when it comes to getting funds from the bank for your business. Just because banks do not take your credit score for the loan, this does not mean you do not pay attention to it. You should make your credit score payments on time. This helps you to improve your credit score.
  • Check your cash flow – when you are applying for a loan, you should check your cash flow. Banks presume that small businesses do not have a steady cash flow and it is challenging for them to buy equipment, inventory, new physical business locations, etc. Banks are aware of this, and so they refuse loan applications from small business owners. Another problem most small business owner face is balance in their bank accounts. They generally have a low balance even if they enjoy regular profits. Banks take note of this, and this is another reason why they say no to small business loan applicants. Small business owners claim they are unable to keep a good bank balance in their accounts as they have to make payments to suppliers and other third parties. It becomes challenging for them to maintain a high balance in their bank accounts. Industry experts in the field of money lending state that small businesses can eliminate this problem if they keep track of the incoming profits and outgoing costs. They have to calculate the profits and create a feasible monthly budget that is simple for them to follow. Practice will make them perfect and maintain a balance becomes simple for them.
  • Collateral – Banks will ask for collateral. This is something you should be ready with when you wish to apply for a bank loan. The unfortunate reality for small business owners is that they do not have solid collateral for a bank loan. Some of them even risk their personal assets for getting a loan however experts to say this is not a wise idea at all. In case, you default in loan repayment; you face the risks of losing everything. Be wise before you stake your personal assets for a business loan. Besides the above, if you are searching for a business loan as a small business owner, you must have an operating financial history of at least two years before applying for the loan.

As a small business owner, you are aware of your major sources of cash, and this is why you should invest in money management and other saving techniques to help the cash flow of your business improve. This, in turn, will reduce the operating costs of your business. If you want to have a good bank balance, you must also evaluate business processes in your unit. Are they generating the profits you deserve? As a business owner, you must eliminate processes that are redundant in your unit. Innovation is the key to making a transformation in your business to trigger better profits for your business unit with success. So, if you have targeted on a bank loan for your business, evaluate the business costs and resources. Work on its improvement before you get the extra money you need to spice up your bank balance before you make the loan application. Chances still are rare if you are a small and new business however you can try if your other areas like papers, business plan, etc. are strong.

Therefore, when it comes to money lending as a small business owner, if you are eyeing banks, think twice. Do you have everything in order and if you do there is no guarantee that your business loan application will be approved. So, stop making applications to banks and opt for alternate money lenders that are driven to help your small business grow. They help you with loans, and their application process is simple. They even help you if you have poor and bad credit. Talk to them and see what they have on offer. Compare them with time and check fees, terms, and conditions before submitting your loan application to them!

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Written by Amy Walsh

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