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Top 5 Reasons Why Banks Reject Small Business Loans

Are you thinking of applying for a small business loan, but are afraid of being rejected? Has a bank already denied your business capital? If so, you’re not alone. According to a survey conducted by the Federal Reserve Banks of New York, Atlanta, Cleveland, and Philadelphia, only half of small businesses that applied for loans were approved in the first half of 2014. Given this information, what is the reasoning behind all these denials?

1. Bad or No Credit

Banks often deny loans to small business owners who have poor or no credit at all. Credit scores carry massive weight within the banking industry and are a main influence on a borrower’s risk. If an applicant has a history of late payments, defaults, or a high debt to equity ratio, banks see them as risky borrowers and will be hesitant to approve their funding. Even applicants with slightly-below-average credit are often overlooked. In the eyes of a banker, a low credit score means that a borrower does not prioritize paying their debts.

2. Not Enough Collateral

Nearly all banks require applicants to back business loans with some sort of collateral such as land, homes, vehicles, or some other type of asset. If a borrower defaults, the bank has the right to claim this collateral as payment. The problem is that many business owners do not have enough collateral to satisfy the bank’s requirements. If an applicant does not have anything that the bank sees as valuable, they will have trouble securing funding.

3. Cash Flow Issues

Banking institutions examine a business’ ability to generate profits and maintain a steady amount of cash to cover their operating costs. Even if a business is profitable, they could struggle to maintain a steady cash flow due to slow collection of high accounts receivable or the need to pay suppliers up front. If money is going out at a faster rate than it is coming in, banks will see this as a big red flag and deny a business funding.

4. Industry Problems

Even the most profitable businesses with strong cash flows and profit margins can be denied funding if a bank sees trouble on the horizon for the applicant’s industry. For example, a bank will be less likely to lend to a trucking company if projections indicate that fuel costs will skyrocket in the not-too-distant future. If incoming changes in the economic landscape have a high possibility of creating problems for a loan applicant’s business, a bank may be less inclined to take this risk.

5. Seeking Small Loans

According to a 2014 Harvard Business School working paper written by Karen Mills, a former United States Small Business Administration administrator, a majority of small businesses apply for loans that are less than $100,000. Many banks see small loans like this unworthy of their time and would rather underwrite a larger loan to make a larger profit. Even though it costs a bank the same to process a $100,000 loan as it does a $1,000,000 loan, banks are more interested in catching a big fish than a bunch of small ones.

Denied Funding? Contact Green Ocean Solutions

If a bank has rejected your business loan application, the Los Angeles business lenders from Green Ocean Solutions can provide you with short-term or term financing in as little as one business day! Unlike banks, we do not require applicants to have good credit, collateral, or industry requirements for approval. With loans ranging anywhere from $2,500 to $800,000 and fixed interest rates, we can get your business the funding it needs with as little hassle as possible. When banks say no, we say yes!

Call (888) 997-2179 or apply online today to get started.