More than 99.8 per cent of Australian businesses in 2018 were classified as small- to medium-sized enterprises or SMEs, employing around 2.2 million people. Even though they significantly impact the economy, many small companies and nonprofits still struggle to raise funds.
Why are banks and other companies afraid of lending to SMEs? Let’s look at some of the more prevalent ones and what you can do to avoid them.
Here are three top reasons your business loan application was turned down:
Banks are careful and will only lend to people and companies with a good credit history. If you exhibit a bad credit score, you can expect to see your loan application rejected.
Lenders also want to see companies with a history of paying their bills. Good payment history will improve your credit score and make other lenders more willing to offer you deals.
Lenders can also deny you a loan if you have an insubstantial net worth.
There are two ways to improve your owner’s net worth. The first is to increase your take-home pay to have more disposable income. A better cash flow will also allow you to get a higher payout of dividends.
The second is to have a high level of assets other than the business. You can do this by having a high level of assets in your house, car, or investments. This will show that you can pay for your loan, even if your business does poorly over the next year.
You can increase your owner’s net worth by paying yourself a healthy salary and investing your profits wisely in other assets.
Banks seek more than just good financials and want to see an SME demonstrate the ability to repay the loan. Business, investments, and personal funds are examples of assets that can be used to repay a debt, so it is best to build your asset to gain more credibility.
Many banks are using technology and analytical tools to quickly analyse a business’s systems when it comes to loan applications. If the accounting systems cannot produce reliable financials, then the loan application will be denied.
If you try to apply for a small business loan using faulty accounting systems, there is a significant chance you will be rejected. This is why it is vital to work with an accounting firm that can get you the best systems for your business.
If your business is just starting out, a bank may not give you a loan because your business does not have the cash flow needed to pay back a loan.
The cash flow is an important part of a business loan application. Bankers want to see a lot of cash flow because it is one of the indicators that the business will have enough capital to survive. You need to show that you have a healthy cash flow and make a profit on that cash flow.
The more you refuse to take enough risks, the more you’ll find it challenging to improve your cash flow. A risk assessment is usually made depending on the size of your company and the amount of time that you have been in business.
No amount of creativity on your part will change that your finances are bad. Before you can start borrowing money from a bank, you’ll need to get good financial credentials and show your business is profitable and have a good trend going forward.
If you have been rejected for a loan before, you can also connect with loan experts to help you get positive results in applying for a loan in the future.
Shore Financial is finding the best commercial loans or business funding. It can be difficult, time-consuming, and complex. We’re very efficient in connecting businesses with top commercial and business loan providers; that’s why we are Australia’s fastest-growing mortgage brokerage. Contact us today!