The bank said “NO!” You were counting on that small business loan to help your business grow. If it makes you feel any better, you’re not alone.
Over the last few years, large banks have been reducing the amount of loans that they’re issuing to small businesses. The Wall Street Journal reports that it may be because of, “Weak demand, tighter lending standards and high costs have put a lid on small business borrowing” following the 2008 economic crisis and it’s taken the last ten years to correct that mindset. Bottom line – most banks aren’t small business friendly, even though they advertise they are.
However, getting rejected is never fun, even if the circumstances are out of your control. That’s why you should know exactly why your loan was rejected in the first place so that you can make sure that it never happens again. In most cases, a trusted business advisor who understands small businesses and banking is a necessary part of your team.
Sometimes a bank will share these details, but if not, I find that it’s typically for one or more of the following five reasons:
- Time in business and limited collateral
- Weak cash flow
- Bad credit
- Lack of preparation
- Outside conditions
Time in business and limited collateral
For new small business owners, obtaining a bank loan may seem like one of the best ways to jump- start your business, or at least get you through your first trying year. Loans for those situations do exist. But, you are probably not going to find them at your local bank. If you’re looking for a traditional simple interest business loan with a monthly payment you’re going to need to be in business for at least two years.
You may even have difficulty qualifying for this type of loan until you’ve been operating for at least three years. The reason? Traditional loans require two full years of tax returns to prove consistent gross and net profits. Additionally, small businesses that are just starting out often don’t have the collateral, such as equipment or real estate, required if your business ever defaults on the loan.
You may have to look for alternative sources of funding, such as peer-to-peer lenders, crowdfunding, or online merchants, if you just started your business. If your credit is good, these types of loans will be no problem. On the other hand, if your credit is a challenge, these non-traditional loans can be very, very expensive. As for collateral, if necessary, you can use personal assists like your home or vehicle.
Weak cash flow
Banks are very concerned that businesses have enough cash flow to make monthly loan payments in addition to covering their payroll, inventory, rent and other expenses. Unfortunately, many startups and small businesses struggle to keep enough money in their bank accounts even when they’re profitable, often because they have to pay 3rd-party suppliers upfront before they get paid for their product or service.
By creating and sticking to a budget, small business owners will have a better idea on how much cash is coming and going through your business operations. If you notice that there is a weak cash flow then you need to cut expenses and find ways to bring-in some extra so that banks won’t reject your application. Most small business owners make the mistake of not asking for help in this area.
Credit history is one of the first things that lenders will review when going over a business loan application. A good credit score proves that the business owner has properly managed both of their personal and business finances by avoiding bankruptcy and making all of their payments on-time.
A poor credit score, however, can make lenders wary since it demonstrates that the individual can not make well-informed financial decisions and are unable to meet the financial obligations that are included in the loan agreement. This is even the number one reason why payment processors will reject you and your company from even accepting payments.
The good news is that you can repair your low credit score by paying your bills on-time, getting your credit card balances under control (not cancelling your cards) and repairing any mistakes that appear on credit reports. Keep in mind, bad credit on either the business owner or the business can impact the business getting a loan.
Lack of preparation
Many businesses simply aren’t savvy about the application process and believe they can walk into a bank, fill out an application and get approved for a loan. When your banker says, “no, you just don’t qualify”, he may well be saying 1) you’re not structure properly, 2) you have no direction or plan, or 3) you haven’t developed the right company infrastructure.
Prior to applying for a bank loan, the Small Business Administration suggests that you have a written business plan, financial statements or projections, personal and business credit reports, tax returns, and bank statements. Also included should be copies of legal documents, which include articles of incorporation, contracts, leases, or any licenses and permits that you need for your business to operate.
What if you have a solid credit score, strong cash flow, collateral and have prepared everything you need for loan, but are still turned down? It could be no fault of your own. It may just be outside conditions that are out of your control.
Outside influences are always considered prior to a loan approval or decline. They can include
industry experience (do you have the work background to manage your own business), a business’s location, local or regional economic trends, competitors.
Furthermore, there are local, state, and federal ordinances, along with factors like, such as local climate conditions, that could influence an applicant’s approval or denial. It could even be as simple as your bank has too many loans in your industry.
Banks are just more cautious since the 2008 recession, in part because of regulations about lending money to businesses that are considered risks. Unfortunately, this includes small businesses since they don’t have the proven track record of established or larger businesses.
How We Can Help
No one’s perfect, but that shouldn’t stop you from getting the capital you need. That’s why Banks & Associates works with our network of lenders to get you approved for a loan despite not having a perfect credit score, or being a startup lacking a strong cash flow. Call our team today to get connected with an advisor who can help you get approved for a loan.