If you’ve been refused a business loan, you won’t be the first and you certainly won’t be the last. It can be really frustrating when you’ve been planning your business expansion and getting excited about innovative ideas just for the bank to decline your application. But sadly, banks are more cautious than ever about who they lend money to, which often means business owners are under the microscope when applying for loans. If your bank won’t tell you why your application was denied, here are the most common reasons.
Bad Credit:
A good credit history tells a lender two things: the person applying is good at managing their finances and makes good financial decisions. A bad credit history does the exact opposite. A bank will want to know they’ll be paid back on time and in full. If you’ve been rejected because of bad credit history, take the next six months to increase your credit score. Pay your bills on time, balance out any credit card or loan payments and address any points on your record that may be out of your control.
Cash Flow:
Your lender will want to see your business accounts before approving a loan. If it’s obvious that the business struggles to keep cash in the bank, it could be too high of a risk for a lender. See more about what small business lenders look for by going through the criteria before applying. If the money you make with your business goes straight back out to suppliers or payroll, it’s likely you won’t have the disposable income to pay back a loan, no matter how small. You can resolve this by creating a budget for your business and sticking to it to allow for increased cash flow.
Length in Business:
Believe or not, start-up loans are easier to get than traditional business loans. So, if you’re not a start-up but you also don’t have more than two years of trading behind you, you may find it very difficult to secure a loan. That’s often because banks want to see at least two years’ worth of tax returns to prove that the business is making adequate money. Some banks will consider offsetting a loan against business assets, but if you’ve been in business for less than two years, you’re unlike to have that kind of collateral anyway. The only way to fix this problem is to keep trading to the two-year mark.
Preparation is Key:
It doesn’t matter if your business ticks all the boxes. If you walk into a meeting with your bank manager and you’re unprepared, you could be refused initially. You need to know what your bank needs from you in order to approve your loan. You should have a relevant and up to date business plan with you, along with financial statements, tax returns and financial forecasts for the next five years. If you can impress during your meeting, the loans manager is far more likely to take a chance on you.
Being rejected for a loan doesn’t mean you’ll never be approved for one, so do what you can to improve your chances next time.
