It is no secret that conventional bank loans are hard to acquire for businesses. But this was not always the case. In the 20th century in the United States, banks gave out business loans much more easily to businesses since there were lesser regulations and restrictions. That changed drastically after the financial crisis of 2008, which shook the U.S. economy as well as the economy of every other country.
After that, the government put certain checks and balances on banks and the loans they give out (since the financial crisis happened because faulty loans were given out on mortgages that led to millions of people defaulting). Today, all national banks have a lengthy and rigorous vetting procedure before they approve business loans to small businesses.
So it is no surprise that the rejection rate for small business loans is 20% in the U.S. However, there are some pivotal reasons why small businesses in particular struggle to acquire loans from banks.
Reasons Why Small Businesses Struggle to get Bank Loans
Incomplete Business Details:
Banks provide loans to only those borrowers who prove they can pay them back on time. This means you have to provide complete business details including:
- A detailed business plan outlining the mission and primary goal of your business along with 3 to 5 years of financial projections, competitor analysis, market landscape analysis and the strengths and weaknesses of the business.
- Financial Statements
- Credit Scores
- Tax Returns
- Debt Schedule
Failure to provide all of these details results in banks rejecting small businesses for a business loan. There are over 29 million small businesses in the United States so the competition is high and complacency or carelessness while applying for a bank loan will only damage your chances. So be sure that when you do apply for a business loan, you provide all relevant details that can help the bank in ensuring you are deserving of the loan and are capable of paying it back as well.
Falling Short of Requirements:
Banks have strict requirements for businesses to qualify for loans. Most small businesses fail to acquire a loan because they fall short on one criterion or the other. Bank requirements for loan applicants are:
- A sufficient credit score of at least 640+. Note that the credit score refers to a three digit number. This number shows lenders, or you can say assures lenders about how likely it is that you repay the debt. It is determined by how often you make payments on time as well as how many accounts you have in good standing.
- Generally, a business that has been operating for less than 2 years is known as a start-up. Usually, traditional banks are not responsible to give out small business loans to start-ups, even if they are under the SBA regulations. This is because; they are considered a high risk. Hence, so to get a business loan from a bank you need at least two years of business operations.
- Banks require annual business revenue of at least $100,000 or more. The business revenue requirement depends on the size of loan you wish to take out. The greater the loan the higher will be the repayments and higher must be the business revenue to maintain an average monthly payback amount.
If your business does not fulfill even one of these requirements, national banks will not provide loans to you. Even though these requirements are tough to meet for a new business, yet this is what it takes to acquire a loan from a bank.
Asking for the Wrong Loan:
There is a popular belief that banks do not accept small loan applications. On the contrary, it is applying for wrong loans that result in banks rejecting loan applications. Applying for the right loan means to apply for the loan that is suited to your business industry and can cater to your particular business needs. There are loan packages that are designed for borrowers but opting for the wrong package will undoubtedly lead to rejection. For example, you cannot ask for a short-term loan of 3 to 18 months if you are planning to finance fixed assets such as machinery or building. Using online lending platforms such as Orumfy can help you find the right loan for your business and also achieve ease and efficiency in the loan process.
Giving loan applications after the deadlines are not only frowned upon, it is a sure fire way of getting rejected for bank loans. As mentioned above, there is plenty of competition in the world of small businesses so when a business sends in applications after the deadline; they lose the initiative (and their chances for getting the loan).
These were just some of the reasons small businesses fail to acquire bank loans, and if you wish to apply for and acquire a bank loan in the future then be sure to avoid committing these mistakes.