5 Reasons the Bank Is Denying Your Small Business Loan
The first place most small businesses look for financing is from their bank – and rightfully so. Banks usually have the best rates for loans and your business already has an account open at one. What many first-time financing seekers don’t necessarily realize, is that qualifying for a loan from a bank isn’t always easy. Even if your business seems healthy, you may get declined for reasons that never would have crossed your mind.
This post will look at five factors that might be preventing your small business from obtaining bank financing.
External Factors Affecting Your Industry
The banks will look at the industry as a whole to try and get a better forecast for your long-term success. There are dozens of external factors that could be impacting your ability to secure financing and there’s very little you can do about it.
For example, as gas prices continue to rise, shipping and transportation become more expensive. This could negatively impact your bottom line as your costs of doing business increase – ever more so if you’re in an industry that leans heavily on these services. Another type of external factor that may affect your business is a rise (or fall) in competition. Too many competitors may signal that the market is oversaturated, too few may show that industry is on the decline.
Although you may have no control over the external environment, staying up to date on the factors affecting your industry can help you pinpoint the best time to submit your loan application.
It should come as no surprise that when you apply for a business loan, the bank will pull credit not only for your business but your personal score as well. The higher your score, the better your chances for approval.
No idea what your credit score is? There are several free services you can use to pull your credit and see how you’re doing such as Mogo and Credit Karma. If you need help raising your credit score, the Canadian Office of Consumer Affairs has you covered.
Mistakes happen. It’s possible you miss a small section or mix up a phone number. If the information doesn’t check out, then the entire application unfortunately becomes void.
Take extra care when entering strings of numbers and if filling the form out by hand, ensure your handwriting is clear. Most importantly, read, re-read and re-read again.
Insufficient cash flow
One of the factors lenders use to determine your business’s health is cash flow. It is a very good indicator of your ability to repay the loan and as such, one of the most important things lenders look for.
Before you apply, you should do some number crunching on your own. Make sure your business can handle the added pressure of loan repayment. If you need a hand staying on top of your cash flow, there are plenty of affordable tools out there.
Applying at the Wrong Place
Small business owners often get the short end of the stick when it comes to bank financing. Although not always the case, banks prefer funding bigger loans than smaller ones. You should also be open to borrowing from a bank other than the one that holds your account. Each bank has their own protocols and guidelines – discussing this before applying is a smart move.
The banks denied your loan? Don’t panic yet, there are other options. An online business loan from an alternative lender (i.e. not a bank) has become a common and often preferred method of securing financing. Aside from their decisioning criteria being different, their application and funding process is faster and easier. You can apply online and have funds in your account in as little as 48 hours.
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