The expansion of a small company depends on the owner’s ability to secure financing. A loan denial can be devastating to a company, forcing you to look elsewhere for financing. The good news is that there are easy things you can do to boost your business’s financial standing and make it more appealing to potential financiers.
Here are some of the most common reasons small businesses are denied loans.
- Insufficient cash flow
The Cash Flow Statement details the cash expenditures of a business. This report is an essential element of any financial statement, along with the income statement and balance sheet. Lenders can see your company’s ability to repay a debt based on its cash flow. They will always look at your company’s projected revenue stream to ensure it can cover all present debts and loan repayments.
Even if the business proprietor is willing to sit down and talk about the company’s future and past, that information is useless unless it squares with the numbers. Your company’s revenue flow should be sufficient to cover operating costs and interest payments. You can also use the surplus cash flow to pay back the new debt and finance some of your company’s expansion.
In other words, if the company’s cash flow projections show that it cannot afford to repay the debt, your application may be denied. Lenders don’t want to risk losing their money on a deal that doesn’t generate enough income for the company to survive.
- Poor credit rating
The approval of your small company loan may depend on your business history as well as your personal credit history. Lenders will assume you’ll have difficulty making your payments punctually or carry a significant amount of debt if your credit score is low.
Credit reports for individuals are associated with Social Security numbers, while those for businesses are associated with Employer Identification Numbers. Understand that both your company and personal credit will be considered when applying for a business loan.
It may seem daunting to have to monitor two distinct scores. Fortunately, boosting your company’s credit isn’t all that different from improving your own.
To raise your company’s credit rating;
- Do not be late with your weekly payments.
- Avoid maxing out your credit cards.
- Do not file for numerous credit lines all at once.
Lastly, keep tabs on your credit score, which you can easily do online after applying PlayCroco Casino Bonuses to unwind to a game of poker.
- Existing heavy debt
A functional enterprise’s debt load needs to be commensurate with its current status, expected future development, and overall business strategy. Too much debt can be disastrous for a company. Repaying a new credit with interest can be challenging for an already financially stretched company. If you have a lot of debt, it means you can’t or won’t be able to pay off your debts anytime soon.
A lender’s primary concern is the borrower’s ability to repay the loan, so if you have a lot of other obligations, they will likely reject your loan application.
- No collateral
For financial organizations to extend loans, borrowers must first provide collateral. The amount of money they are willing to lend is contingent upon the value of assets the company has. A greater collateral value increases the potential loan amount. However, if your business is still in its infancy and has few tangible assets, you may be required to put up your own property (homes, cars, etc.) as security.
Your application for funding may be declined if you are unwilling to make this choice. The primary reason small companies are unable to obtain financing today is the absence of sufficient collateral.
- The business is too young
Most financial institutions won’t back new companies because they’re too uncertain about their chances of success. It takes a lot of faith to lend money to a new, small company. If the company is successful, you’ll benefit from the regular payments, but if it’s not, you’ll take a hit.
There is no assurance that the company will be profitable enough to repay the debt. Typically, financial institutions require evidence of a company’s ability to expand while maintaining current repayment terms.
- Missing records or data
It can be time-consuming to apply for business credit, and you might feel overwhelmed by the stack of papers required by some lenders. However, there is a rationale behind the information banks and financiers require.
Lenders use the information you provide to determine whether or not it is a good idea to take a chance and fund your business. You must take the time to carefully read over your entire loan application before submitting it. No matter how long it takes, you must compile and submit all of the financial statements, tax returns, company licenses, and other documents the lending institution has requested.
If you make an honest attempt to comply with all of the requirements, you just might be able to clear the way for acceptance.
Final thoughts
These are some things to bear in mind the next time you try to get a loan for your company: If you want to establish a business, you need a solid business plan and proof that you know what you’re doing in terms of investments. Become involved and improve your company’s goal so financiers won’t second-guess their decision to back your company. If you want to ensure you have enough money, you should seek out several sponsors.