You have just had your business loan application rejected; it is a dreaded situation that can often be disheartening, however, this is not the end. You may have been banking on this business loan, worrying about the survival of your firm without it, and you may wonder what to do next. The first step is to find out exactly why you were rejected, then you can work on solving the problem, so you can be more successful in future applications. Below are five of the most common reasons for rejected business loans.
Your Sector is too Risky
Some industries are labelled as ‘risky’ industries by many traditional lenders, who therefore offer fewer loans in those industries. One example of this is restaurants, due to their particularly high failure rate. The gambling industry and other ‘vices’ can also present extra challenges when it comes to getting a loan. Although these industries can be more difficult, there are lenders who specialise in every industry, so do some research and you will still have options open to you.
A common reason for a rejected business loan is problems with cash flow. If someone is going to lend you money, they need to be confident that you have the means to actually pay it off, while also paying rent, payrolls and other expenses. If you are spending more than what is coming in, then you will probably need to sort your cashflow before trying for another loan. Some ways to solve cashflow problems include prompt invoicing, late fees and cutting expenses. Bear in mind, however, that good cashflow doesn’t automatically mean you will get a loan. How long you have been in business and had good cash flow, makes a difference.
When looking for a business loan, it is important that both you and your business have a good credit score. If your business is new and you haven’t had time to build up a credit history, then the bank will look at your own credit score. If you have a good credit score for your business and your personal score isn’t good enough, you may still be rejected. This is because lenders would argue that if you can’t keep your personal finances in order, how reliable will you be paying back a business loan.
Lack of Collateral
Lots of lenders require you to put down collateral to get a business loan. Collateral acts as a safety net for the lender, in case you fail to pay the loan off. If you don’t have enough to offer, or if it isn’t the right type of collateral, you can be rejected.
Already in Debt
If you or your business are already in a sizeable amount of debt, lenders are less likely to grant you a loan as this can worry them, that you won’t pay it back. To remedy this, try to pay down your various loans, at least so that they have lower balances, and try to negotiate lower interest rates so you can pay them off faster, without all that extra interest.
Securing a business loan can be a difficult task. For peace of mind, speak to a mortgage broker who will be able to assist in finding the right business loan for you.