Five Reasons Banks Deny Small Business Loans

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If you’re a small business looking for a loan to help your company’s development and growth, your firm could be in trouble. Unlike invoice factoring, gaining approval from a bank for a small business loan is a difficult and lengthy process. There are a few major factors that can prevent you from gaining the small business funding you need.

1. Bad or No Credit
If you’re looking to get a small business loan, both your business and you personally need solid credit. Strict credit requirements can cause problems for newer business or young applicants as startups with no business credit history will have to depend solely on the credit of the owner and if they are a young entrepreneur, their credit history may not be good enough to merit a loan.

2. Inadequate Collateral
Lenders aren’t willing to risk default on the money they let your business borrow without a promise of reimbursement. Organize a collateral document that lists everything you can offer as collateral, including both business and personal assets. Price depreciation can also affect your collateral.

3. You’re Already in Debt
If your company already has a fair amount of unresolved debt, from other loans, lines of credit, or something else, lenders will probably not extend further credit to you. Paying down loans and maintaining low balances on lines of credit – less than 35% is ideal, and if that’s not feasible, just keeping it as low as you can – is an important factor in making your application more appealing to lenders.

4. A Poor Business Plan
No bank will want to take a risk on a company that hasn’t planned out or thought through its approach or strategy. Business plans that aren’t specific and are poorly researched are not likely to be approved. This is easy to resolve, as undergoing more extensive research and planning better business strategies can turn your business into a better risk and give your company credibility as to what they will use the loan for.

5. Cash Flow Problems
The bank won’t offer money to a company with serious cash flow problems. If a business isn’t making money, lenders consider it too much of a risk. In the eyes of the bank, how is your business going to pay back the loan with interest if they aren’t profitable? Even if a business does have good cash flow, it doesn’t guarantee that a bank will give them a small business loan, as sometimes it comes down to how old and established the company is.

Invoice factoring makes it possible for small business owners to obtain funding despite bad credit and other factors. No matter how many times you’ve been rejected by banks, it’s likely you’ll qualify for factoring.

Learn more about why your small business should choose invoice factoring instead of bank financing.

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