By: Sharita Humphrey
Business Financing refers to money borrowed from a bank or investor to finance equipment, products, or services that the business needs in order to grow. When setting up your business, you’re likely to apply for financing to get your business off the ground. However, there are several reasons your application might be denied.
In fact, according to 2021 statistics, it was reported that 9% of small businesses that applied for a business loan did not receive any capital.
Here are 5 reasons why you’re not getting business funding:
- Credit score.
A company with a low business credit score is going to have a hard time getting approval for a business loan application. According to 2021 statistics, 36% of small businesses were denied funding due to low credit scores. Credit score plays an important part not just in business but in personal life as well. Most banks and financial institutions look at both the business owner’s personal credit score and the company’s business credit score to determine the interest rate and loan eligibility. When applying for business financing, make sure to keep track of your credit score to avoid being rejected.
- No collateral.
Before institutions lend money, they require collateral in case the borrower becomes unable to repay the loan. The amount of money they will lend depends on the value of assets the business has as well. The higher the value of the collateral, the more money they will consider lending. However, if your company is new, with no little to no physical assets, you may have to offer up personal assets (cars, homes, etc.) as collateral. If you aren’t willing to make this decision, you might face a rejection of your financing application. Lack of collateral has become the biggest for small businesses being unable to secure financing.
- Insufficient cash flow.
Banks will be hesitant to grant loans to small businesses that don’t offer a large enough cash flow to pay off the loan. Often, small businesses struggle to maintain financial stability especially when they’re still starting up. This is partly because they have to pay off rent, third-party suppliers, equipment, and employee wages. In order to secure a business loan, first check to make sure that you’re bringing in more profits than you’re paying out in expenses. You need to have cash flow to be considered for business financing.
- Too much debt.
When you apply for a business loan, a bank will look at past loans, whether you were able to pay them off and how efficiently. If they discover one or more ongoing debts, they may reconsider your application. It doesn’t look good for a business to have too much debt as it shows poor financial management and low income. Settle past debts and make sure they’re paid on time and properly, so you’ll have more loan opportunities to expand your business.
- Too early into the business.
Most banks won’t lend finances to emerging small businesses since it may be a risky venture. Lending money to a small start-up business is like taking a leap of faith. Either you’ll profit from the continuous payments when the business booms or fall when it fails. There’s no guarantee that the business will make enough profit, much less pay off the loan. Banks or investment companies will need security that a business can grow and continue to make payments.
Now that you’ve considered reasons your application may have been denied, here are a few things you can keep in mind when applying for business financing:
- When starting a business, create a thorough business plan and demonstrate an understanding of investments. Engage and upgrade your business vision so that investors won’t regret investing in your business. Look for multiple investors to ensure you have enough funding.
- Crowdsourcing is a good way to find investors. If your business is too small to go to traditional banks for a business loan, you may want to consider alternatives that are willing to invest in small businesses. You may find small firms or financial institutions whose purpose is to help startups or small businesses get off the ground. Double-check to make sure they are legitimate to ensure you won’t suffer loss through scams.
- Know your business. Do your research. It’s going to be difficult to get funding for your start-up business if you don’t know what you need to do. Research the requirements for a business loan, get statistics on approval rates, reach out to a few investors and plan out your business strategy to keep your company afloat.
Most business loan rejections are due to the five points above. But you can set your business up for success by creating a solid business plan, doing your research, and managing your finances well from the start. Work your way toward not needing to apply for any more business loans with a healthy cash flow and strong profits.