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Why Banks are Rejecting Your Application for a Small Business Loan

Whether they’re in need of startup financing or cash to cover expenses, the first place an entrepreneur typically looks is their local bank. Unfortunately, securing small business financing is a much more complicated task than many realize. According to the NSBA’s 2016 Year-End Economic Report, “Despite a significant shift in outlook, small business access to capital remains stubbornly unchanged with just 69 percent of small firms able to get adequate financing.”

Many business owners fulfill seemingly endless requirements, only to find out weeks (or even months) later that they’ve been turned down. Setting them back to square one. Meanwhile, their business has sunk into an even more dangerous cash-flow situation. Applying for financing elsewhere can be even more complicated by the fact that banks don’t always disclose why the loan application was rejected.

If you’ve been denied funding from your bank, consider the following list of possible reasons why you were turned down:

Bad Credit

If your credit situation is poor, it sends the wrong signal to banks. To them, less than stellar credit means the applicant either doesn’t take their obligations seriously, or he or she is willing to take too many risks. The big problem for many business owners is that credit evaluations are not limited to the business itself; they extend beyond the company and into the business owner’s personal life. Even if your business pays its bills in a consistent and timely fashion, your personal finance situation could seriously hinder the number of financing options it has.

Poor Documentation

Many business owners submit their small business loan application without thorough documentation. Specifically, lack of cash flow details and/or an insufficient business plan. Another obstacle, established business have a history; they can provide tax returns, years of sales and projections of future earnings. This will be a challenge for the new business with insufficient history, and therefore insufficient financials. In addition, a bank will be able to smell if a business plan was thrown together at the last minute from a mile away.

Lack of Collateral

One of the most common reasons why business’ fail to secure a bank loan is because they are short on collateral. According to a first-quarter study from the finance site MultiFunding, a lack of collateral categorizes many businesses as “non-lendable”. As a result, many turn to alterative lenders for their merchant cash advance and small business loan options. For a high-risk specialist like First American Merchant, for example, a lack of collateral is not a problem.

Heavy Debt

Similar to bad credit, outstanding debt obligations indicate that the business owner struggles to properly manage money. It could also suggest that the business is experiencing cash-flow issues. Banks want to see that your business has enough cash to cover monthly loan payments on top of rent, payroll, inventory and other operating costs. Either of these situations (or both) is more of a risk than most traditional lenders are willing to take.

Since the financial crisis in 2008, banks’ willingness to lend to small businesses as changed drastically – and not for the better. With raised lending standards and a mission to avoid risk, this has left many entrepreneurs with little to no options. If your business or startup finds itself in this situation, don’t get discouraged. There are many alternative options with high risk specialists like FAM that offer flexible programs, quick capital and easy collections.