With the way the economy is going in recent time it is almost impossible for one to run a successful business with personal savings. It's even more difficult for start ups since they need to buy lots and lots of equipment, hire employees, pay staff, etc. Whether you wish to make small or large expansion, it definitely will require some cash which may not be available through personal savings.
The fact that it's becoming increasingly difficult for small business owners to secure funding through a bank makes it even more challenging. There are a variety of reasons why banks are declining loan requests from small business owners.
We've broken down the top 10 reasons, followed by some thoughts on why these reasons don't apply to alternative financing.
Banks tend to favor SMBs that have a steady revenue stream and consistent cash flow coming in every month. SMBs that can't demonstrate this consistency are denied loans significantly more often than not.
For SMBs, lack of sufficient collateral excludes them from obtaining financing because loan applications usually include a request for a viable piece of collateral in order to complete the transaction and receive funding. That's not a problem for large businesses that own property or other big ticket assets, but it can be an insurmountable hurdle for SMBs.
Banks are wary of lending to businesses that have existing debt with other lenders. In many cases, they won't even consider lending to a business that has already taken financing. Since many SMB owners seek credit from multiple sources, especially during the start-up phase, this can be a major strike against them when applying for a loan or cash advance from a traditional bank.
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Banks are often skeptical of businesses that report a significant bulk of their sales from only a select number of customers. Lenders, in general, like to see diversity in a business's clientele as opposed to the same customers. For example, a local pub or restaurant that relies mainly on its "regulars" for steady income can present a perception problem with traditional banks.
In the wake of the recent recession, banks have increased their credit score standards, but many small businesses have credit scores that are still suffering from the aftermath of the financial crisis. In most cases, a business will need a credit score of at least 720 even to get a foot in the door for a bank loan. That's too high for many SMBs.
Personal guarantees from business owners are requirements from banks, but that also makes the owner personally responsible for paying back the loan. That's a precarious position for those struggling to stay on top of expenses every month.
Banks give preferential treatment to businesses with lengthy and significant track records. After all, they don't want to fund a business that has been operating for a while, but hasn't sustained a certain amount of success and credibility. Banks demand a solid track record of generating profits over a specific time period in order to receive funding. Without that solid operating history, a SMB will make likely be rejected for a loan.
No pun intended, but banks are always concerned with their own interests. They simply will not lend money to a business if they feel that the current economic conditions are unfavorable for getting the money back in a timely manner. This puts an unfair burden on SMBs to maintain revenues and keep costs down when the economy takes a bad turn.
Banks will reject SMBs that don't have strong top-level leadership with a noticeable chain of command, since that can bring up concerns about the organizational integrity and long-term success of a business.
Operating an SMB in an industry that a bank deems as "weak" or in decline will hinder the chances of receiving financing from a traditional bank.
It is nearly impossible these days to keep a small business running with money drawn from your own pocket. Whether it's purchasing inventory, hiring new employees, or opening additional locations, any type of expansion requires extra working capital. Above are just the few reasons why banks don't give out loans to some business. Use the points above as a checklist for applying for business loans.
The fact that it's becoming increasingly difficult for small business owners to secure funding through a bank makes it even more challenging. There are a variety of reasons why banks are declining loan requests from small business owners.
We've broken down the top 10 reasons, followed by some thoughts on why these reasons don't apply to alternative financing.
1. Lack of consistent cash flow
Banks tend to favor SMBs that have a steady revenue stream and consistent cash flow coming in every month. SMBs that can't demonstrate this consistency are denied loans significantly more often than not.
2. Insufficient collateral
For SMBs, lack of sufficient collateral excludes them from obtaining financing because loan applications usually include a request for a viable piece of collateral in order to complete the transaction and receive funding. That's not a problem for large businesses that own property or other big ticket assets, but it can be an insurmountable hurdle for SMBs.
3. Debt-to-income ratio
Banks are wary of lending to businesses that have existing debt with other lenders. In many cases, they won't even consider lending to a business that has already taken financing. Since many SMB owners seek credit from multiple sources, especially during the start-up phase, this can be a major strike against them when applying for a loan or cash advance from a traditional bank.
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4. Customer concentrations
Banks are often skeptical of businesses that report a significant bulk of their sales from only a select number of customers. Lenders, in general, like to see diversity in a business's clientele as opposed to the same customers. For example, a local pub or restaurant that relies mainly on its "regulars" for steady income can present a perception problem with traditional banks.
5. Insufficient credit
In the wake of the recent recession, banks have increased their credit score standards, but many small businesses have credit scores that are still suffering from the aftermath of the financial crisis. In most cases, a business will need a credit score of at least 720 even to get a foot in the door for a bank loan. That's too high for many SMBs.
6. Personal guarantees
Personal guarantees from business owners are requirements from banks, but that also makes the owner personally responsible for paying back the loan. That's a precarious position for those struggling to stay on top of expenses every month.
7. Insufficient operating history
Banks give preferential treatment to businesses with lengthy and significant track records. After all, they don't want to fund a business that has been operating for a while, but hasn't sustained a certain amount of success and credibility. Banks demand a solid track record of generating profits over a specific time period in order to receive funding. Without that solid operating history, a SMB will make likely be rejected for a loan.
8. Economic concerns
No pun intended, but banks are always concerned with their own interests. They simply will not lend money to a business if they feel that the current economic conditions are unfavorable for getting the money back in a timely manner. This puts an unfair burden on SMBs to maintain revenues and keep costs down when the economy takes a bad turn.
9. Insufficient management team
Banks will reject SMBs that don't have strong top-level leadership with a noticeable chain of command, since that can bring up concerns about the organizational integrity and long-term success of a business.
10. Weakening industry
Operating an SMB in an industry that a bank deems as "weak" or in decline will hinder the chances of receiving financing from a traditional bank.
Conclusion:
It is nearly impossible these days to keep a small business running with money drawn from your own pocket. Whether it's purchasing inventory, hiring new employees, or opening additional locations, any type of expansion requires extra working capital. Above are just the few reasons why banks don't give out loans to some business. Use the points above as a checklist for applying for business loans.
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