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The Real Reason Banks Deny Loans to Many Small-Business Owners

Kabita always knew baking was her forte. When she decided to start her own little confectionery shop she started off with her small pool of savings. She knew baking but not how to run a business. Soon she felt the need for help with inventory management, more equipment and most importantly marketing. No one said that challenges to grow a small business would be small. Don’t let a rejected loan application dampen your spirits.

Money is the lifeline of any business. Absence of adequate funds can easily fizz out a business. While being denied a Loan can pull the ground under your feet, but don’t let it stray you from your path. Like Kabita, many small business owners are shown the door by lenders.

So here we are with an article that will help small business owners to do their homework that will help them dodge a rejected loan application.

Typical Lender’s Curve Ball

loan for small business

So you recently checked with the bank on your loan status and have learnt that it wasn’t approved. If you are wondering what could have led to the rejection then possibly it is one of the following:

  1. No Business Value:- The lender is not comfortable with the value of the business. They are not convinced of the prospect of growth. Like any investor, lenders evaluate on the basis of financial statements, financial ratios, profitability, market capacity etc. When the business lacks the likelihood of growing, it will certainly be less profitable in future and subsequently the lender doubts getting a refund of their money.
  1. No Collateral:- You have applied for a loan and haven’t provided good enough collateral. Unsecured loans are risky for if the borrower does not repay the loan then the lender has nothing to fall back on. They have to rely on other means to extract the money which is not easy for the lender and certainly jacks up their costs of extraction too. Thus, in the absence of collateral, banks would reject outright. Do note, banks have their own panel of valuers and assessors who value the collateral. You may have your reason to believe that your collateral has a higher value but the bank will depend on the report submitted to them by the valuers hired by them.
  1. It’s a High Cash Dependent Business:– A business that has high dependence on cash is not fit for lending. For example, a restaurant where the customers pay for all transactions in cash. Here, there is a risk the proprietor may not account for some transactions. In such a case, the restaurateur should provide his customers the facility to pay through credit cards and encourage use of it. This will give more comfort to the bank and seeking loans will become relatively easier.
  1. Credit Score & Report:- That is true. Businesses are also marked by CIBIL on their borrowings and repayments made thus far on their debts. Just as in the case of individual borrowers, business scores and report are most important in making an impression on the lender. If there are red flags in your report, a previous settlement or missed payments then it could scare away the lenders. In case of proprietorship and partnership firms, the individual scores of the owners are checked during loan evaluation.
  1. Lack of experience of proprietor or keyman: The main person, upon whom the business depends, may be lacking enough experience and depth of vision. The lender might not have complete faith in that person’s complete ability to run the business. If you are someone who is always available, nurtures the business like his own baby, is always on toes and makes sure competition does not grow under your feet then, you will certainly impress the lender with your ability to lead the business.
  1. The Business is already over-leveraged:- Are you already neck deep in debt? This will be a huge deterrent for lenders. What a borrower must ensure is to first service their existing debts before they go applying for more loans.

Final Few Words

The most important ingredient for the success of a business is the “entrepreneur”. It is the entrepreneur’s vision, dedication, ability to run the business, build relationships and please the customers that makes or breaks a business. While the entrepreneur is the key ingredient, money is what brings all the elements of the secret sauce of success together.

Rejecting a loan can crush their dreams to dirt. Make sure, you are prepared with a plan B if your loan application is rejected. Better still, work around the obstacles to make sure your loan is not rejected. For a lender it is about getting their money back. In simple terms, wherever a lender is convinced of getting their money back they extend finance.

The post The Real Reason Banks Deny Loans to Many Small-Business Owners appeared first on Credit Sudhaar Blog.



This post first appeared on Credit Sudhaar Blog - Tips To Improve Your Credit, please read the originial post: here

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