Every business, big or small, old or new, needs capital to set up, run or expand the businesses. The first source of funding is the savings of business owners and partners. But when the business grows, you look for external funding. Bank loans are the first option. And if a bank has rejected your business loan, do not be disheartened. Banks and conventional lenders are strict about lending as business comes with heightened financial risks.
This article will explain the reasons behind business loan rejection and how business owners can handle this situation.
Identify the Reason for Business Loan Rejection
Sometimes, a loan is rejected because certain criteria are not fulfilled or there is a mistake in the loan application. You can take this loan rejection as a challenge, analyze what went wrong and understand the reason for rejection. Once you know the reason, you can work around it to ensure your business can get the required financing and be on good terms in the future.
- A Workable Business Plan: First and foremost, you should have a correct and workable business plan, sharing a clear picture of your business finances and defining your future objectives. It should include your current and estimated revenue, balance sheet, debtors’ and creditors’ details, and number of employees and their salaries. Any vague information on this can lead to the rejection of the loan.
- It may be your first business plan and have many gaps. However, an expert business consultant can help you shape your business plan and make it presentable to banks and other investors.
- Business Credit Score: Late payments of credit cards, bad credit history, and high debts are big turn-offs for lenders. According to Equifax Canada, a good credit score lies between 660 and 724. Your loan application can be rejected if your business has a poor credit score or no credit history.
- Hence, it is better to start building your business credit score from Day 1 of your business by using business credit cards and making timely payments. These small efforts may be rewarded with easy credit availability at favourable terms.
- Submitting Incomplete Loan Application: Any wrong, incomplete, or inaccurate information can lead to loan rejection. Even a small error in filling out a loan application can be a blunder when approving a loan. An accountant can help you with your loan application and all the supporting documents and financial statements banks ask for.
- Type of Business: Loan approval also involves factors like how old or new your business is, its performance and the risk involved. Some banks may have rules regarding not lending to a particular sector. Make sure you approach a bank that has given loans to a similar business in the past and is open to the sector you operate in.
- Financial Ratios: When banks scrutinize your business loan application, they use financial ratios to assess the capability of your business to repay loans. For example, they analyze a company’s current ratio, which shows its ability to meet its short-term liabilities when due. If the ratio is less, there are higher chances of loan rejection.
Apply to Other Banks and Lenders
You can consider approaching another bank or traditional lender, depending on why your business loan is rejected. If the reason for rejection is small, you can apply for a loan at another bank, but be transparent and truthful, as lenders might cross-check your application with the previous bank.
Consider Secured Business Loans
You could consider applying for a secured business loan if your business loan is rejected for higher credit risk. In such a loan, you put certain assets as collateral against which the bank provides you a loan. If you cannot repay the loan, the bank can sell the assets and recover the loan amount. It gives you access to finance, and the bank gets security against credit risk.
Consider Alternate Financing Options
There are alternate lending options available, but the stakes are different. Other lenders invest in riskier options if conventional banking is not your option. For instance, venture capitalists and angel investors give money to startups without much financial history for higher interest rates and some equity stake in your business. You can also explore many fintech and crowdfunding platforms and opt for the one where you get the best terms.
Every money lender, be it a bank or any private loan provider, has its own set of rules, regulations and clauses. Chances are another may accept a loan rejected by a loan provider. Studying about the money lender before applying for a loan can be helpful. You can compare the terms different loan providers offer and choose those best suited for your business.
Before you take external funding, analyze your business situation from a lender’s perspective. Avoid taking a significant loan early in your business or expanding too fast without a guarantee of servicing the debt. A business consultant can help you work the finances and take calculated risks.
Contact Edelkoort Smethurst CPAs LLP in Burlington to Help You with a Business Loan
A business consultant is well-versed in various financing options and banks’ policies. The consultant can guide you around the banks and lenders where your loan has a better chance of getting approved. They can also help you through the loan process and a repayment plan. To learn how Edelkoort Smethurst CPAs LLP can guide you with your business loan, contact us online by telephone at 905-517-2297.