More often than not business owners will need to apply for a small business loan at some point, usually to acquire a business.
Some other popular reasons a business might need finance are:
- Paying operating expenses;
- Expanding the business;
- Launching a new product;
- Emergency funding.
One of the problems with using business loans for emergency funding is that being a successful applicant is not always guaranteed. There are many reasons why your small business loan is rejected and you need to understand these reasons before you start filling out the application or allow your financial situation to become critical.
Your Business Credit Is Not Good Enough
If you are not putting up collateral to guarantee your loan, then your company will need to have the best possible credit to get approved. That is why it is important for business owners to monitor their business credit and do whatever they can to improve their credit standing. Some of the actions a business owner can take to improve their company’s credit include:
- Paying all bills before their due dates;
- Doing business with companies that offer credit accounts and report those accounts to the credit agencies;
- Monitoring the company credit account to check for errors.
If your loan gets rejected because your company has bad credit and that surprises you, then that you are not keeping a close enough watch on your corporate finances. Monitor your credit reports and do everything you can to strengthen your company’s credit rating.
You Have Overextended Your Limit
If your company habitually borrows money from banks to sustain operations, then you will hit a point where the banks are no longer willing to extend you any more financing. This is why it is important to plan all of your business borrowing and limit your loans to only those that your company actually needs.
You can significantly improve your company’s finances with a good loan program and credit score by relying on your cash flow to pay your operational expenses. If your cash flow does not allow you to pay your bills each day, then you should be addressing the issue of your poor cash flow instead of trying to put a bandage on the problem with business loans.
Your Company Has Too Much Debt In General
When a business is the victim of bad planning, then it can start to take on debt (bad credit) that will cripple its finances in the future. A bank will look at your entire debt structure before deciding on whether or not to approve a business loan and if your company owes too many people too much money, then your loan will not get approved.
Some of the sources of debt beyond bank lending include:
- Credit cards;
- Lines of credit;
The simple fact is if your company is too tied to recurring debt, then a lender is going to be hesitant to loan you money. Maintain your debt properly and you will have a better chance of getting the funding you need through a business loan.
Your Management Structure
When a bank considers a business loan, especially a sizable loan, your company’s managerial structure becomes important. The bank wants to see qualified professionals in necessary positions of management to insure that your company will be productive enough to pay back the loan. When a bank decides to approve a loan, it is making an investment in your company.
As with any other investor, a bank wants to feel comfortable with the people in charge of your company before giving the green light.
During the Great Recession of 2008, one of the big global economic problems was that banks were not lending money to small businesses. Even businesses with spotless credit found it difficult to get the funding they needed to pay their bills or expand their operations.
If the economy is weak, then banks are less likely to lend. This could mean a weak global economy, a weak national economy, or a weak economy within your own industry. It can be frustrating because this means that your company really had nothing to do with the rejection, but it can be reality.
Businesses with strong plans and sturdy credit tend to get their loans approved more often. But the truth is that business loans should only be used in strategic instances and not as ways to sustain operations. A bank is going to want to see a company that can manage the money it has before it decides to give that company a small business loan.