Have you recently applied for a small business loan and have been rejected? You are not alone. Banks and trade unions reject several business loans because of their stringent eligibility criteria. Small business owners can handle such rejections tactfully. Understanding why your loan got rejected is the first step towards working on resolving the issue.
You will be surprised that small mistakes or a different approach can ease the loan process and get you the financing you seek. Let’s see what small business owners can do if a business loan is rejected.
Understanding Why Banks Rejected Small Business Loan?
Banks and credit unions are risk-averse creditors as they lend depositors money and are regulated by the central bank. Hence, they have a long list of eligibility criteria to ensure the borrower can repay loans. They look for companies with good cash flows, lower debt, and strong growth prospects.
A bank can reject a business loan for the following reasons:
- Incomplete financials
- Incomplete loan application
- Irregular cash flows
- High debt
- Poor credit score
- Insufficient credit history
- Early-stage startups
- Insufficient collateral
- Poor business plans
Some issues, like incomplete financials and loan applications, can be fixed immediately. You can seek the help of a professional accountant to apply for a loan. Even though it might look like a job you can do yourself, an accountant is well-versed with the bank’s credit scrutiny and can increase your chances of loan approval, saving you time and loan processing fees.
About the remaining issues, some can be fixed over time by improving your business cash flows and repaying debt. Hence, it is important to ask the bank in detail about your loan application, what you need to change, and when and how you can reapply for the loan.
Problems That Can Be Avoided by Planning Ahead
Business is all about planning ahead and preparing your company for all types of situations. Even if you don’t need a loan now, you should follow these business practices to be prepared for future debt requirements.
Fixing Irregular Cash Flows
A business’ cash flow shows the company’s ability to make timely payments. The possible reason for irregular cash flows could be:
- Payment delays by customers – you can set up a robust invoicing system with regular follow-up with clients. You can also offer some discounts for early payments or impose late payment charges to encourage customers to pay up and keep your cash flow healthy.
- Unused or unsold inventory blocking your cash – a regular inventory review can help you identify products that don’t sell often and avoid ordering them. You can also sell the unsold inventory at heavy discounts (probably at breakeven) to reduce the storage cost and unlock blocked cash.
- Higher expenses – an earnings review of your income statement can help you identify areas where you can cut costs and improve cash flow.
Small Business Having High Debt
If your small business already has a significant debt on the balance sheet, there is a high chance the bank might reject new loans. Most banks have a debt-to-income ratio threshold of 30-35%. Having too much debt is not good for your business finances.
A professional accountant can help you update your accounts, track your financial ratios and alert you when these ratios show alarming signs like high leverage or low incomes. You can consolidate your debt and focus on repaying the existing debt first. At the same time, you can focus on improving income by cutting costs and boosting revenue.
Whether or not you take a business loan, maintaining a healthy debt-to-income ratio can give your business financial flexibility to invest in growth opportunities and help sustain crises.
Poor Business Credit Score
Make no mistake the credit score we are talking about is your business score and not your personal score. A business credit score closer to 900 improves your chances of getting a higher loan with better terms.
If your business has been regular on payments of debt and to suppliers, your credit score could be high. However, it is a good practice to check your credit score for any errors. Sometimes, the banks or creditors might not update the debt status. You can rectify that so that it does not impact your loan application.
There are instances when your business is new and has no credit history, leaving you with a weak business credit score. A good strategy would be to apply for a business credit card as soon as you start a business, do your transactions from it, and pay the full amount when due. You can also use the overdraft facility even when you have cash. Using such small credits and making timely repayments could help you build a credit score for your business, so it gets a loan when in need.
Looking Beyond Banks at Alternative Lenders
There is a possibility that banks might reject your loan application even after you have come well-prepared. They have certain types of industries to whom they don’t lend.
When bank loans don’t work, look for other financing options like alternative lenders (private lending companies, fintech lenders), and venture debt. Alternative lenders are an option for businesses with poor credit scores, early start-ups with less than a year of operations, or risky and controversial industries like cannabis.
Investors are not bound by banking rules and can take credit risk for a higher interest. Venture debt investors might ask for some equity ownership of your company. Small business owners can look beyond debt at other options like crowdfunding platforms, angel investment and venture capital, and peer-to-peer lending. But consider these financing options only when returns outweigh the high interest.
You could even face rejection from alternative investors if your business model is not viable. Rushing to expand without a strong business plan could be dangerous and pull your business into a debt spiral. Sometimes, it is better to stall your expansion plans and first work towards strengthening your existing business. You can seek the help of a professional business consultant to revisit your business plan and start fresh.
Contact McCay Duff LLP in Ottawa to Help You with Business Financing and Consulting
A professional accountant and business consultant can help you review your business plan and identify the best financing options or government benefits you might be eligible for. At McCay Duff LLP, our accountants and business consultants can provide services such as business reviews and business financing consultation. To learn more about how McCay Duff LLP can provide you with the best accounting and consultation, contact us online or by telephone at 613-236-2367 or toll-free at 1-800-267-6551.