It is nearly impossible to sustain a business all the way with personal finances. At some point, there would always be a need for external funding, whether it’s for purchasing equipment, hiring employees, or expanding operations. For most businesses, one viable way of getting funds is through bank loans.
Despite this, it is becoming increasingly challenging and burdensome for small business owners to secure bank loans. For some, it has been a dreadful experience and they have had several rejections. So, what happens next after the bank says NO to your business loan application? In such instances, it pays to find out why your application was rejected so you can have a better chance with your next application. Many banks will include the reason why a loan application was rejected while others won’t. Some would only give a summary, and you could be left wondering what they mean exactly.
If you are clueless about why your loan application has been rejected, here are some of the many reasons why that could have happened:
- Lack of consistent cash flow
Banks tend to favour SMEs with a steady monthly revenue cash flow; those without this are often denied loans. Therefore, work on your monthly income and try again. It is also possible that you have a consistent cash flow, but you don’t have the records to prove it. Don’t joke with your account books. You never know when they would be used to judge you.
- Not operating a business long enough before applying for a loan
Because many small businesses fail within the first couple of years, banks and other financial institutions tend to favour more time in business when they grant loans. This is because they view SMEs that have been in business for longer as promising, and trust that they would be able to deliver on loan repayments. If you haven’t been operating your business for long, then you need to find the right lender for you. Take a critical look at your options when deciding where to apply for a business loan.
- Inadequate collateral
A lack of adequate collateral excludes many SMEs from obtaining financing. Many lenders include requests for viable collateral to complete transactions. After a bank goes through your application and notices that you don’t have good collateral, your application would be rejected. It is advisable to either measure up to the level of collateral required or seek alternative sources of financing that do not require collateral.
- You are not asking for enough money or you are asking for too much
Endeavour to review your business plan and projections to ensure you are not underestimating or overestimating the amount of capital you need. If you don’t need more than you are asking for, state it clearly.
- Economic concerns
Banks often consider their self-interests; they simply will not lend money to a business if they feel that current economic conditions are unfavourable for getting their money back promptly. Such conditions put an unfair burden on SMEs to maintain revenue and keep costs down.
- The leadership/ management team
Banks will reject SMEs that do not have strong and structured leadership with a clear chain of command. Ensure that no matter how small your business is, it has a good organizational structure, even if it is a sole proprietorship.
Getting rejected for a business loan when you need financing can be one of the worst feelings ever. Remember, though, that it is not personal, and you can try again. After you get past the initial frustration, it can be a good learning experience that prepares you for success next time.