Getting a business loan is a part of being an entrepreneur, and it's considered a worst-case scenario if your loan application suddenly gets denied when you need it the most. When that happens, what do you do next? Before taking the next step, you should first find out why your business loan application was rejected.
1. Cash Flow Issues
This is the main reason why businesses don't get loan applications approved: lack of cash flow. If a bank is considering two businesses with the same business plan, but one of them has a strong cash flow, and one has a weak cash flow, the bank will choose the one with a strong cash flow. This is a no-brainer.
2. Lack of Experience
If you have no experience, credibility, or validation, you'll have a difficult time getting your loan approved. This is especially true if you're just starting out. Banks don't like giving money to people with no experience, no matter how promising the idea seems to be. You'll have to have a strong business plan and a lot of validation to get that loan.
3. Poor Credit History
If you have a poor credit history, the lender might be concerned that your business may not be able to pay back the loan. If you have a history of late payments, excessive debt, bankruptcy, or loan default, it could be a sign that you're not as financially stable as you need to be.
Even if your business is doing well, having poor credit history means you're already off to a bad start. If you don't have any credit history, well, it's going to be next to impossible to get a loan. You'll need to establish a healthy credit history before you can apply for that business loan you've been waiting for.
4. Investing in Second-Hand Assets
Instead of investing in brand-new assets, many investors choose to buy second-hand assets. This is usually because they can get new-quality equipment at a lower price. If a bank sees your business spending a lot of money on used assets, they'll be less likely to lend you money because there's a possibility that the equipment will need costly repairs in the future.
5. Lack of Collateral
Businesses often borrow money using security as collateral. This is usually in the form of a property or equipment. However, if your business is a startup and doesn't own any property or equipment, it won't be easy to borrow money. But don't lose hope. There are lending programs for startups.
6. High Risk of Failure
The final reason why business loan applications get rejected is the high risk of failure. When the risk of failure is too high for the lender, they will deny your loan application. If your business has no collateral, not enough cash flow, and a high possibility of failure, then you might want to reconsider your business idea.
Applying for a business loan is challenging but not impossible. The first step to securing a business loan is understanding why your loan application was rejected. Once you know the answer to that, you can begin to build a more solid business plan and establish your credibility. At the end of the day, it all comes down to you. In order to get a loan, you have to build your credibility and show the lender that you're the right person to borrow the money from.
Wealthy You offers hassle-free mortgage solutions to all our clients. As one of Sydney’s premier mortgage brokers, we make finding loans simple and stress-free. Whenever you need great alternatives for small business loans or home loans, Wealthy You is the one to call. Contact us today to get started!