Top Reasons Why Your Loan Application Was Rejected
One of the absolutes of life is that one day or another, you are going to have to face rejection. There are many different forms of rejection – some are not in our control but there are others where we can reduce our chances of rejection by taking the necessary measures.
As a business owner, it is always a scary thought to consider what would happen if a loan that you were in dire need got rejected by the bank. Who would you then turn to? What’s the next step you would take?
But before any of that, you would try and figure out why your loan was rejected in the first place. It is not unusual for banks not to go into specifics of their reasons for rejection, but by law, you are mailed a notice explaining the reasons that led to the rejection of your loan application.
In this article, we will look into the different possible reasons as to why banks reject some loan applications:
1. Your credit score –
Lenders determine whether or not your business is trustworthy enough to provide you with business advance funding by looking at your credit score. The threshold limit is different for each lender but most do require a score of 600 (i.e fair) and above. The higher your credit score, the more the chances of the business returning the loan in the eyes of the lender.
If your business hasn’t been around for long, it may not have built up enough of a credit history to apply for a small business loan. Credit history is made based on payments, and transactions between suppliers and vendors. Reports of your payments can help build a credit history, which will make it easier to qualify for a loan while not having enough credentials can have a detrimental effect on your loan application.
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2. High-risk businesses –
Being in an industry that is associated with a lot of risks can also create a few hurdles towards your acceptance. Examples of such industries include those specializing in high-tech products, casinos or restaurants. Since these businesses are exposed to a high level of risk, their chances of survival are difficult for a lender to judge, making them a risky lending option.
3. Poor Cash Management –
Operating in any industry is not risk-free, as there is a lot more cash flowing out of the business rather than flowing in at the start. Lenders and banks are always interested to know the amount of cash at hand for the business. They want to make sure that the cash flows are enough to cover not only the business expenses but also to keep it afloat and allow it to return the loan.
Poor cash management is the bane of many small businesses, as it is one of the leading causes of failing businesses. If your business has severe cash shortfalls, it is a sign that your business has difficulty managing its cash flows, increasing your chances of rejection.
Rejection is definitely one of the worst feelings in the world and there is a myriad of reasons as to what your application could be lacking in the eyes of the lender. While it is definitely not the end of the world to have a loan rejected, it is always good to be aware of the possible reasons that could have caused it so that you can avoid making the same mistakes and increase your chances of success in securing future loans.
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