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5 Main Reasons Banks Turn Down Small-Business Providers for Loans
You were counting on that small business loan to help your company grow, but the bank said"no" If it makes you feel any better, you are not alone.
Throughout the last couple of years, large banks have been reducing the amount of loans they're devoting to small companies. The Wall Street Journal reports that it can be because of,"Weak demand, tighter lending standards and high costs have put a lid on small company borrowing" following the 2008 economic meltdown.
However, getting rejected is never enjoyable, even if the conditions are out of your control. That's the reason you should know exactly why your loan was rejected in the first place so that you can make certain it never occurs again.
Occasionally a bank will discuss these details, but should not, I find that it is typically for one or more of the following five reasons:
1. Bad credit
Credit history is one of the first things that lenders will review when moving over a business loan program. A good credit score proves that the business owner has properly handled both of the personal and business finances by preventing bankruptcy and making all their payments on-time.
A bad credit score, however, can make creditors cautious as it demonstrates that the individual can not make well-informed financial decisions and are not able to fulfill the financial obligations that are included in the loan agreement. That is even the number one reason a payment processor like myself may reject you and your company from accepting payments.
The good thing is that you are able to fix your low credit score by simply paying your bills ontime, getting your credit card balances under control (not cancelling your cards) and fixing any mistakes that show up on credit reports. Keep in mind, bad credit on either the business owner or the company can impact the business getting financing. Here are a couple additional credit myths I've put together you ought to know about.
2. Weak cash flow.
"Banks are very concerned that companies have sufficient cash flow to make monthly loan payments as well as covering their citizenship, inventory, lease and other costs," says Warren Lee of TheLendingMag Media Group. "Unfortunately, many startups and tiny companies struggle to keep enough cash in their bank accounts when they are rewarding, frequently because they have to pay 3rd-party suppliers upfront before they get paid to their product or service."
By creating a sticking to a budget, small business owners will have a better idea how much money is coming and going via your business operations. If you notice there is a weak cash flow then you want to cut expenses and find ways to bring-in some extra so that banks will not reject your program.
3. Time in business and limited security.
For new small company owners, getting a bank loan might seem like one of the greatest strategies to jumpstart your business, or at least get you through your first trying year. Amy Blatterfein points out in a post for Ventury Capital,"Loans for those scenarios do exist. But, you're not going to locate them at the regional bank. If you're looking for a traditional simple interest business loan with a monthly payment you're going to have to be in business for at least two decades."
You might even have trouble qualifying for this kind of loan till you've been operating for at least three years. The reason? Traditional loans need two full years of tax returns to prove consistent gross profit and net profits. Furthermore, small businesses that are just starting out frequently don't have the security, such as equipment or property, required if your business ever defaults on the loan.
You may need to look for alternative sources of financing, for example peer-to-peer creditors, crowdfunding, or online retailers, in the event that you just started your small business. As for collateral, you can use personal assists like your residence or vehicle.
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4. Deficiency of preparation
"Many businesses simply aren't informed about the application process and think they can walk into a bank, fill out an application and get approved for financing," says Mark Palmer, managing director and analyst at BTIG.
Prior to applying for a bank loan, the Small Business Administration indicates that you have a written business plan, financial statements or projections, private and business credit reports, tax returns, and bank statements. Also included must be copies of legal documents, including articles of incorporation, contracts, leases, or some other licenses and permits that you need for your company to operate.
5. Outside conditions
Imagine if you have a good credit rating, solid cash flow, security and have prepared all you need for loan, but are still turned down? It could not be a fault of your own. It can just be outside conditions that are out of your control.
"Outside influences are always considered prior to a loan approval or decrease," says Diane Roehrig, president of Alacom Finance. "They can incorporate industry experience (do you have the job background to manage your own company ), a business's location, local or regional economic trends, competitions"
Additionally, Roehrig claims there are local, state, and federal ordinances, together with factors such as, for example local climate conditions, that could influence an offender's acceptance or denial.
Banks are only more careful since the 2008 downturn, in part because of regulations regarding lending money to companies that are considered dangers. Sadly, this comprises small companies as they don't have the proven history of established or larger businesses.