Why Banks Deny Small Business Loans

There are many reasons why banks deny an applicant’s small business loan request. Unfortunately, this happens too often, even when the business idea is a great one. Why does this happen? Why is it so hard for entrepreneurs and small business owners to gain the financing they need to start or run their business? Understanding the reasons behind denial can make avoiding denial easier by allowing potential borrowers to fix any road blocks to approval before applying.

Business Credit Score

A huge reason many potential borrowers are denied a small business loan is that their business credit score is lacking, or non-existent. When it comes to loans, a lack of credit is just as bad as poor credit. Many borrowers do not think about the fact that their business may not have built its own credit yet.

Another issue is the liquid credit score. This one uses a combination of variables that contain the age of business and the owner’s personal credit score, among other business components. If you need a loan and lack business credit or have poor business or personal credit, start now building that credit before you apply. Lenders vary on which credit score they look at for approval.

Cash Flow

Another road block to the approval of small business loans is cash flow, or the lack thereof. A business can be well-established and have stellar financials, but if the cash doesn’t flow, the bank isn’t going to let go of the money. Without a steady flow of funds, there isn’t a way to make the loan payment.

Knowing this, it is essential to create a cash flow statement for your business. If you see there could be an issue, take steps to loosen up some funds so that a lender will be less likely to see cash flow as a deterrent.

Security

Most banks prefer secured loans. In fact, many do not offer unsecured loans at all, and if they do the interest rate is substantially higher. If the business does not have acceptable security to offer, then a bank may be less likely to approve the loan.

Consider feeling out lenders to determine if you have anything that would be accepted as collateral. If you do not, begin to prepare yourself for an unsecured loan and seek out lenders that offer such. Other forms of financing may also be an option if a lack of security means a traditional loan is not. Research options and see what is out there.