Ever had one of your business loan applications get rejected?
40% of SMEs in Australia had applied for finance in the past, and nearly 23% found their loans rejected by their banks. (And the rejection rate went up to 37%) This was 37% for SMEs that were in operation for less than five years. (Source: A 2019 research commissioned by online SME lender OnDeck)
Its a nightmare that all business owners want to avoid, for sure! It could put your growth plans in limbo with no cash to spare.
As a business owner, you should know why small business loans get rejected, so that your application never gets a “No”, or at least you don’t make those mistakes again.
Here are the top 11 reasons why lenders reject small business loan applications.
1. Bad credit history
It could be because you didn’t make payments on time, have a heavy outstanding debt or a high credit utilization ratio. Approaching too many lenders could earn you a bad credit history as well.
If you’re the sole owner of your company, your personal credit history also matters. This is ignored if your business is well-established, or you can provide substantial collateral.
The good news is that you can improve your credit.
Fix your credit score by getting a business credit card, making some quick, big purchases, and paying on time.
If you don’t want to make the mistake of approaching too many lenders, a loan broker can help by tactfully approaching only mutually agreed upon lenders to ensure your credit score remains intact.
2. Incorrect application, incomplete paperwork, insufficient documents
Some of the typical mistakes that banks and other lenders can’t overlook are:
- No updated financial records
- Use of funds is not clear
- No or weak business plan
- Business structure is unclear.
- Date of incorporation is wrong or missing
- No or incomplete insurance information
- No details of past tax returns
Double-check all your entries in the application form. Get it vetted by an expert or a loan broker.
3. Too less time of operation
Bigger banks and financial institutions usually require you to be in business for more than a year to be considered for a loan. If you’re a young business, look beyond traditional banks and apply to alternative money lenders.
4. Not enough income
Lenders calculate your ability to repay, and they need to be confident that you can pay the minimum monthly payments.
Moneylenders are always wary of businesses with low revenues, cash flow issues and other problems that can’t be fixed with a loan.
5. Cash flow reports and projections are not strong enough
Your cash flow should cover your operating costs and loan payments. Traditional banks will look at 2-3 years of your cash flow history, while alternative lenders are more lenient and look back just a few months.
6. Debt utilization is not optimal
Lenders use a debt-to-income ratio to check if you can make payments once your loan is approved. This should prove that you can afford a new debt. It’s best to keep your ratio below 30%.
If your debt utilization ratio is too high, it means that you most likely won’t be able to repay your new loan.
If it’s too low, it indicates that you’re inexperienced with managing debt.
7. Collateral is not enough
If you apply for a secured loan, and you don’t have a personal or business asset like the property, or any other investments, then money lenders may reject your application. And before applying, be clear about what makes for collateral and what won’t.
8. Risky industry
If your business belongs to one of the high-risk industries such as gambling or cannabis, there’s a high chance that your loan application gets rejected. Even if your business is doing well, these industries are highly subject to the crackdown of regulations at any given time.
9. Loan amount you requested for is not enough for the bank
Didn’t expect that, right?
In fact, traditional banks prefer to issue bigger loans, on which they can earn higher interest. From their perspective, they need to invest almost the same time and effort required to service a 250,000 AUD loan and a 500,000 AUD one.
10. No business bank account
Companies without a business bank account find it increasingly tough to secure credit. Many lenders use business bank account data to verify your business revenue, balances and time in business.
11. Applied for the wrong loan or to the wrong lender
The last thing you want to do is apply to the wrong loan or lender for lack of proper guidance on the different types of loans and lenders, their pros and cons, and their requirements.
This is a gray area where an experienced loan broker can help. A good one will engage with you, understand your requirements and recommend the best type of loan for your needs.
Before you approach a lender or a loan broker, it makes sense to assess your business yourself. Check for any red flags in your application, your credit history, debts, and so on.
It’s a good idea to get the help of a trusted loan broker like Capital Boost to navigate this complex process smoothly and not let your loan application get rejected.
Tagged in: Business Loan Rejection, Small business loans, Business loan applications, Alternative money lenders