Podcast Episode 34: Reasons Why You Were Denied a Small Business Loan
Below are five reasons why you might get denied for a bank loan:
Bad credit will automatically put an applicant in a rejection pile at a traditional commercial bank. The key is to get your credit score in the 700s and above. You can improve your credit by paying off your debt, decreasing your credit card balances, and paying your debt.
2. Lack Sufficient Cash Flow
Banks are seeking customers who can pay their existing debt as well as their proposed debt. Banks measure your cash flow by mathematical ratios such as debt service coverage ratio or debt to income. These ratios tell banks how much cash you have available to pay your debt and how much you have left over.
A key way to improve your chances is to pay down your existing debt and/or increasing your income.
3. Insufficient Collateral
Banks want to ensure that they can recover the debt owed to them by liquidating the collateral. If the collateral you are borrowing against isn't worth anything, there is a good chance that the answer may be no. If you ever bought a home, the maximum loan-to value is typically 80%. That cushion is there for the cost of liquidation and the time it may take for your asset to liquidate.
4. Not Enough Years in Business
It's been said that it's better to have an okay business idea with an outstanding management team versus an outstanding business idea with an okay team. Execution is what makes a business do well. Banks may look at your application and turn you down because they don't believe you have the experience to get the job done. The learning curve may be too detrimental to your business.
5. Your Industry May Be Too Risky Or It May Be Out of the Bank's Lending Criteria
Let's face it, every bank has that list of industries which they cannot lend to including start-ups. If you have a restaurant start-up, there is a good chance that your neighborhood commercial bank may say no. Also, some banks do not lend to home based businesses or check cashing stores. Before you go through with your application, make sure that the bank you are approaching actually lends to customers in your industry.
Tune into the latest Veranda Financing podcast episode to learn more!