Many business owners decide, at some point, that taking out a loan to help finance their company is imperative for their growth and success. However, like any application for a loan, a position, or otherwise, it is not guaranteed that your request will be approved. Here are three reasons your small business loan application might be denied.
1. Insufficient Funds
Unlike a gift or a scholarship, a loan that’s given by a lender is rented, and must be paid back in full according to payment terms agreed upon by the two parties involved. Because the lender will want to know that he is guaranteed to be paid back in the determined amount of time (and paid the extra interest attached to the loan), he will need to make sure that the lendee has the funds for it. Of course, if someone is borrowing money, it’s because they do not have the full amount available to them for immediate use. However, someone asking to borrow a large sum who has no money at all, to begin with, is a red flag for any lender. Make sure that your account has a sufficient amount of money to prove to the lender that you are not in the red, and need his moeny for the purpose of trying to climb out of it.
2. Declining Revenue Month-to-Month
One of the first things a lender checks before granting small business owners a loan is their past year’s bank statements. This gives them an general idea of the ebbs and flows of cash flow, by month. Most business will see ups and downs during different times of the year, that’s very typical. However, if a lender sees that each month a business owner’s revenue has continually declined, this is a sign that the business might be failing. If the business fails and there is no more cash flow, the chances of the lender being paid back become slimmer and slimmer. Before applying for a small business loan, check a year’s worth of bank statements and make sure that they show regular inclines and declines in revenue.
3. Debt-to-Income Ratio is Higher Than 50%
It’s okay for a business to have some debts to pay off, whether it be from previous loans, order backlogs, or payment returns. However, there is a limit to how much debt a business can be in, in comparison to the revenue it earns. If the ratio is higher than 50%, meaning that the company’s debt is higher than the money coming in, it becomes a serious red flag for any lender. It’s simple math; if you owe more money than you make, and you want to borrow even more of it, the chances of you paying it back are quite low.
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