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Reasons Why Small Businesses Are Struggling to Find Loan Approval

October 27, 2023 -
Valliance Bank
Why Small Businesses Are Struggling to Find Loan Approval?

Growing a small business is challenging, regardless of how amazing your idea is! A significant obstacle most small businesses encounter is the increasing interest rates attributable to political uncertainties. Initially, it was easy for businesses to get funds to grow their businesses, but the economy has changed, and it has become quite challenging.

It is now common for big banks to drive community banks out of the market. Most of the community banks are the ones that facilitate small business banking, and their absence adversely impacts lending practices for small and medium-sized businesses (SMEs). Statistics indicate that if you are a small business owner looking for funds for a new venture, there is a high likelihood that your loan application will be declined.

Read on to learn why small business owners are struggling to secure bank loans.

Bank Loans are based on High Market Regulations

The 2008 global recession led to numerous regulations, causing banks to be more cautious and small businesses are perceived to be riskier than established businesses because they have less operational experience.

During the market recession, small-business sales plummeted, undermining their demand for loan capital. SMEs collateral also lost value during the financial crisis, which made some less creditworthy.

Small Businesses Have Low Profitability on Smaller Loans

Banks always prefer large businesses over small businesses because small business’s profit margins aren’t as high. Small businesses usually borrow smaller loans compared to established businesses because they are not undertaking huge projects compared to established businesses, therefore, most banks will decline their requests.

Small Business Lack Loan Collateral

Small businesses need to provide collateral, an asset used in securing a loan, to provide the bank security in case the loan defaults. Collateral may include equipment, real estate, or anything a bank can repossess and sell if a loan defaults. However, this is challenging for small businesses because startups often don’t have enough collateral, therefore their loans are declined.

Poor Credit Scores

Small businesses with bad credit scores, often won’t be able to get the loans they apply for. Therefore, small business owners should know their credit scores before applying for any loan, and they should also work to establish a robust credit score from the start, even when they think they will not require a large loan from any financial institution.

Understanding your credit score increases your chances of loan approval and business growth.

Small Businesses Have High Operating Costs and Slow Growth

Most banks want to see a business’s growth projections before financing them. However, small businesses often grow slowly, which makes it hard for banks to service their loans.

It is sometimes difficult for small business owners to cover their operating costs, which is in part because it is challenging to increase inventory, and because a tight job market is making it difficult to find new employees. Therefore, the banks think small businesses won’t be able to cover their expenses causing it to be challenging for them to secure loans.

Inadequate Cashflow

Most small businesses seek loans to cover operating expenses and expansion, which means they must have surplus cash flow. Although lack of cash flow isn’t always the cause of a business’s failure, it is one of the reasons that banks often deny financing applications are denied.

This is because business owners often prioritize expenses over loans. For instance, a business owner may pay for daily and monthly expenses such as rent before paying loans. If your business can’t cover its day-to-day expenses, a bank will be concerned you won’t be able to pay back the loans.

Small Businesses Pose High Risk

The type of business you run, such as if you’re the sole proprietor, maybe another reason it is challenging for you to secure financing. Additionally, banks are reluctant to finance businesses in certain industries.

Small businesses pose high risks, can pose high risks, especially when they are new. Banks will assess the customer base and are more likely to approve loan applications from industries with stable customer bases.

Inexperience in Understanding the Financing Process

Banks expect small business owners to understand the 44 financing options depending on their area or industry. If a bank discovers you are not knowledgeable about these options, it raises a red flag regarding transparency and creditworthiness.

Researching and applying for the numerous financing options can be time-consuming, so consider reaching out to local business authorities for tips.

The Bottom Line

Before applying for a loan, small business owners must adequately prepare by knowing the status of their current financing and their future growth projections.

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