4 Reasons Why Lenders Reject Business Loans
Most startup entrepreneurs face this nightmare. They were counting on this funding for several months only to find that the bank has finally rejected the loan application. What happens next? Then, a lot depends on the lender. Why the application was turned down in the first place is another aspect to think. First things first, a business owner must understand why funding was denied. What is the concern of the lender? A couple of banks may tell a business owner the reason for rejection while others may not share the details. However, legally, banks usually mail borrowers why the business loan application was denied.
Did you know that rejection might not be a one-time affair? The lender may refuse approval multiple times. When such a thing happens, business owners often feel disappointed. Then, entrepreneurs should explore other lenders and business lending options instead of approaching traditional banks all the time.
According to an article published on https://www.huffpost.com, today lenders look at business records, reports, underwrite, and analyze data to determine whether they can fund a startup or not. Usually, a company’s account books, payment history, discipline, and other related details are reviewed before approving business loans. It means that lenders reject commercial loans for many reasons than one. Here are four of the most important reasons why a business loan may face rejection:
- The business has less than a year’s experience in the industry
When a business or startup is new, even less than a year and has no business credit history, the loan application may face non-approval. Even if a company has been operating for a year or so but has a poor credit history, the funding is not possible. Some vendors do not report what you have paid to business credit institutions. No matter if, one is dealing with a new supplier or another vendor; the business owner should ensure all payments are reported so that the company can build a healthy credit rating.
If the above information seems disappointing, there is no reason to feel that way. There is no doubt that entrepreneurs can start a successful business with adequate working capital. It is possible even for new ventures that have been in the industry for a couple of months. The key to the success of business loan approval is knocking the door of the right lender.
There are traditional lenders such as banks that require much time to approve a business loan. Business owners in need of immediate funding should explore other options like online lenders. These lending firms will evaluate three months worth of commercial transaction history of the company applying for a business loan. It is not necessary that a startup should operate for five years and then look for business funding.
- High debt utilization
Usually, lenders like entrepreneurs using not more than 30 percent of the total credit available at the time of applying. Some businesses use too much of the credit and the lenders feel that you have high debt utilization and would fail to repay on time. Let us explain this point with the help of an example. Say, for instance, a business owner has a $120,000 line of credit and utilized $110,000 of that limit. In such a situation, the lender considers the business owner has high risks associated with the business loan and may fail to repay the same. Small business owners can look up websites like https://www.libertylending.com/ to understand debt utilization limits in a better way.
Again, business owners with no or poor credit history or those with poor payment records in the past can go against the person. Therefore, lenders require small business owners to monitor their total credit limit. It includes all personal credit cards, business credit cards, and lines of credit. It will help entrepreneurs to maintain a realistic debt usage.
- No proof of sufficient business cash flow
Lenders often look at business cash flow when scrutinizing loan applications from entrepreneurs. The approval or rejection depends on the amount of cash flow in the company. The lenders will like to determine whether an entrepreneur has enough funds to cover business operation expenses as well as possess the financial ability to repay the loan without going bankrupt. If a company has poor cash flow or the business faces regular lean periods, it is a warning sign for lenders. In such a scenario, the business loan application has high possibilities of rejection.
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Poor cash is also one of the major reasons why startups close down their operations. Sometimes, these enterprises also shutdown a specific department or change their business model. If a lender finds any of these happening to a company, then chances of rejection are high for small business enterprises.
Therefore, it is imperative that startups use accounting applications to generate income and cash flow reports as well as projections. It is also important to keep track of the cash flow weekly before applying for business loans. The business owners must ensure that their company has sufficient cash flow as well as act diligently when collecting payments from customers. The lenders feel skeptical when approving commercial loans if they find that the company is allowing dragging their invoices for one, two, or four months at a time.
- Average or poor credit rating
Although online lenders have flexible lending terms that do not mean entrepreneurs should take chances all the time. Many times, a poor credit rating is one of the key reasons for business loan application non-approval.
One lender may differ from another when looking at credit scores and approving business loans. Even the personal credit rating of an entrepreneur is considered when it comes to commercial loans. It does not matter whether the company has been in business for many years or not. What matters is a more or less healthy credit score and payment history for easy business loan approval. The logic is simple. If a business owner cannot manage his individual credit, why should he be trusted with a commercial loan? There is no assurance that the entrepreneur will repay the loan amount to the lender.
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Business loan rejection is the worst that can happen to an entrepreneur when in dire need of funding. Business owners must avoid the reasons that lead to non-approval.
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