Securing a business loan can be incredibly lengthy especially for new comers to the market, business loans might seem unattainable at first. Even though there has been an increase in online lenders, businesses still face a lot of difficulties and hardships to avail capital for their venture. But that is just one side of the coin, why do lenders reject loan proposals? Is that not their main source of income? Well, let us go through some of the reasons behind loan rejections for businesses.
- Failure to understand the credit score
It seems a lot of business owners do not know what their business credit score is or do not know how to interpret it. If the business’ credit score is too low or poor, the lenders will reject the loan proposal since the business becomes too risky to invest in. So, the first step to improve your chances of securing a loan is to understand the credit score and how it works. - Inadequate cash flow
The lenders or creditors would want to make sure that they are giving loan to a business that will at least stay in the market until their debts have been paid off. They also need to know the business will have enough income to pay timely installments and interest rates, will stay on top of their rent, as well as have enough capital to keep the business going. So, if the business spends more cash than it has available to spend, chances of their loan proposal getting rejected are very high. - Weak Personal Guarantee and Limited Assets
A borrower’s ability to personally guarantee a loan will depend on his/her’s personal credit score and assets they have as collateral. Strong positive cash flows in the business coupled with good credit score could result in lenders lending without the need for the borrower to be a homeowner. - Lack of proper record keeping or business management accounts
Being able to understand and see the state of your business is very important to help motivate and encourage lenders to lend. A successful business with inadequate record keeping is seen as a risk because the owners lack control of its operations and maybe not reporting their tax on time and this could result in HMRC winding up the business. - High existing debts and declining sales
If the business has previous loans that have not been settled yet and have a high balance outstanding, lenders will be hesitant to approve another loan to that business. For lenders this is a high risk proposition as they are unsure of the business’ capability of paying back the loan with interest.
Business loans are a must and are required by all the businesses at one point or another. But there are instances when a loan proposal gets rejected. This list will help you prepare for any shortcomings that might have an impact on the business’s loan eligibility.
