Stories of rejections flood the timelines of many business owners and so these stories have somehow shaped the idea that business loans are difficult to get. In reality, business loans can be gotten without hassle but this is only possible when the borrower meets the requirements. Now, this is where the difficulty may come in but once you learn the ropes, meeting the requirement shouldn’t be a big deal.
If perhaps, you were one of those who applied for a loan this year and got rejected, then these are the top 8 reasons that may have led to that decision –
- Bad credit history.
- Lack of financial records
- Poor character.
- Inconsistent cash flow.
- Cyclical or arbitrage business.
- Minimum revenue requirement not met
- Lack of collateral or credible guarantor
- The abundance of existing debt.
Bad credit history
This is one of the major reasons for many loan applications getting rejected but many don’t notice that because it is sometimes not listed on the lender’s terms and conditions. Small business owners especially tend to overlook this because they assume that they would be able to make up for their credit history in no time but when this does not happen, it lowers the credit score of the card owner.
Most lenders have a “cut-off” mark of 600 when it comes to credit scores so anything less than that is likely to get you a rejection. This is why it is important to maintain a good credit score whether or not you plan to apply for a loan soon. You can check your credit score with a reputable credit bureau like the CRC Credit Bureau
Lack of financial records
As a business owner, you should not lose your financial records or keep scanty profiles of expenses and profits. If you do this, there is little to no way you can prove to your lender that your business is deserving of their investment. Banks, agencies, and individual lenders love to see intending borrowers come with all their records because they do not want to go through the rigor of having to resort to legal options to get their money back. If you haven’t started keeping records yet, then this is the sign that you needed.
You would rarely ever meet a lender that tells you that they take into consideration a borrower’s character. In fact, they would rather watch you silently than include that in their criteria just so they can observe if you are “being real”.
Beyond being a formal partnership, lenders and borrowers initiate a relationship the moment they sign an agreement and no one ever hopes to be in a “toxic” relationship. If after carrying a background check on your character, the lender confirms that you would be a toxic partner, they would rather turn down your request than take the risk because there are many other business owners with a good character out there who need the loan.
Inconsistent Cash Flow
When applying for a loan, the lender asks a series of questions and one of them is access to your bank details. The aim of this question is to know how frequently you receive payments and this would inform the decision of your lender. If credits are received once in a while, this would act as a red flag against you because the lender cannot be absolutely certain of receiving a repayment on the agreed date.
Cyclical or Arbitrage business
Cyclical businesses hit a gold mine when the economy experiences a boost and this is a good thing but when the economy falls, then revenues dip with it as well. This makes them a liability in certain seasons and when such business owners apply for loans, the lender would be taking a huge risk by granting such application.
How would they be able to pay back if the economic situation takes a downturn? Unfortunately, this is not something that can be predicted so both the lender and borrower would be taking risks by going into an agreement.
Minimum Revenue Requirement not met
Every lender has certain eligibility criteria and this usually includes a minimum revenue. Say, for example, you intend to borrow ₦400,000 and your monthly revenue falls anywhere between ₦100,000 to ₦300,000. If the lender expects you to repay within three months, then it would be risky for them to assume that you would be able to raise ₦400,000 in three months not neglecting the fact that you would have to meet some needs with the revenue that comes in. when the interest rate is added, it would be almost unlikely that you would be able to pay back in due time and that could be another red flag.
Lack of Collateral or Credible Guarantor
Everybody loves good collateral and in an emergency, collaterals come in very handy. With the increase in loan applications, it is quite evident that many businesses are finding it quite difficult to generate funds as they always have and if by any means, a business owner fails to repay a loan when due, then the lender would have no option but to take over the collateral. So, if a business owner does not have valuable collateral, then the lender may most likely decline your application to get a loan.
We however do not require collateral for our business loans but you will have to provide a credible guarantor when applying for our loan
The Abundance of Existing Debt.
This is the worst mistake you can make as a business owner. When you take multiple loans that you cannot repay, then you are setting yourself up for multiple rejections in the future. Lenders see you as a huge liability and no one likes a liability, not even you.
With the pandemic and all that has happened recently, business owners are seeking loans more than ever before and lenders are being more careful because they know that not every intending borrower may be able to pay back in due time. This has caused a slight strain in the borrower-lender relationship with the borrowers ending up heartbroken after a rejection.
Knowing all of these, you should put in your next application from a more informed position and hopefully, you would get an approval.