Reason Banks Deny Loans to Many Small Businesses

If you are a small business owner, you may have realised that you face more challenges than what the big business owners face. This is mainly attributed to business records. Big business will often have a credit record and other clear business records like bank transactions, profit records and so on. A small business, on the other hand, may not have the same due to its small scale. This means that as a small business owner, you are unlikely to get a secured loan with the traditional lending institutions such as banks. However, there are business loan lenders such as Discovery Credit, that are tailored to meet the needs of these small businesses.

The small businesses face a number of problems that the large businesses can easily manage. Among these is difficulty in financing operation costs, paying wages, poor credit history, lack of properties to be used as collaterals and so on. Below are the main reasons many small businesses are denied loans by banks.

 

Low business credit score

A low credit score is almost an automatic reason to be denied your business loan by the banks. For a small business owner, you may not have developed a good business credit score due to the small nature of the business or maybe because the business is relatively new. Banks are keen on checking your business credit score to see how you will repay the loan. The sad thing is that most small business owners are not even aware of the existence of the credit score. They don’t realize that their business is graded every time they borrow and repay a loan from any financial institution.

Lack of a good business credit score is, therefore, a likely reason to be denied a loan as a small business owner. You should, however, find out your business credit score in order to be certain.

Poor personal credit

When taking a loan for your business, more likely than not, your lender may require your personal credit records as a backup. This especially the case if you are a small business owner. This is because most new business owners do not have enough business financial records that can sustain a loan application.

If you have a poor personal credit record, your small business will be denied the loan. It is good to note that, if you co-own a business with other persons and you own less than 50% then the other owners must have good personal credits too.

Lack of business records

Lenders would always ask for your business records. This can be both financial records and revenue records. Unlike big and established businesses, small businesses may not have these records. This is because most small businesses have just started up and there may be difficulty in keeping the revenue records and most probably may not have transacted a lot in the financial banks and hence have no or few financial records. This usually becomes one of the most common reasons banks deny small businesses loans.

Bad credit history

This is different from low business credit score in that, this is about past loan payment challenges. This can be due to challenges with past loans, over borrowing or poor business cash flow or some other reasons. Most traditional lenders like banks take business credit score seriously, and a bad score isn’t favourable. This will, therefore, be a likely reason for being denied a loan as a small business by the bank.

Your business is new

Most businesses start small and then grow. This, therefore, means that most of the small businesses are relatively new businesses. Most traditional lenders like banks view new businesses as having no track record and hence the uncertainty is higher compared to established businesses. This makes the bank to, therefore, most likely deny them business loans. If your small business is, therefore, a new business and your loan was rejected by the bank, then the reason may be because your business is new.

High-risk business

Another reason your loan for your small business was denied may be due to the fact that your business is in a category that the banks consider it to be risky. These are businesses that have the highest rates of failure according to the banks. There are sectors in the economy where banks generally consider them to be risky to give a loan to, may be due to their past experiences. An example is the retail stores. If you happen to fall in such a category, it may be the reason your small business was rejected by the bank.

With all that said, the banks may deny small businesses loans not necessarily due to one of the reasons discussed above. It could be due to a combination of two or more of the reasons. It is always good practice to inquire the specific reason the bank denied your small business loan so that you know how to about the next step.