The biggest challenge starting or running a business in any country is lack of financing capital. Most people that wish to start a new business do not have the required capital. Since it’s nearly impossible to run a business with money drawn from your pocket, taking a loan becomes inevitable.
Small and Medium Enterprise (SME) owners always face a lot of challenges whenever they want to secure loan from banks or other financial institutions. However, there are reasons behind this ordeals. In our research, we are able to come out with ten (10) reasons why bank reject business loan proposal.
Note: if you need government free-interest loan, see list of federal government loan and how to apply.
- 1 10 reasons why bank reject business loan proposal
10 reasons why bank reject business loan proposal
Below are the major reasons banks reject business loan proposal;
1. Inconsistent cash flow
SMEs that are inconsistent in the flow of their income is usually refused from accessing the loan. However, those SMEs that has a regular or consistent flow of revenue are opportune to be granted the loan.
2. Insufficient collateral
For loan to be granted by financial institutions, SMEs owners are required to tender a sufficient and verifiable collateral. The absence or lack of this will make such individual to be denied of the loan. That is why big enterprises doesn’t go through this pressure because of the great asset and properties they have. Therefore, before SMEs can succeed in receiving loan from financial institution, they must present a sufficient and verifiable collateral.
3. Insufficient Credit
Lack of sufficient credit is another thing that brings challenges to SMEs whenever they desire a loan from financial institutions. Most times, enterprises will have to meet a credit score of at least 720 before they can be considered for their request. The increase in the credit score is as a result of the economic recession.
4. Personal Guarantees
Another criteria before an enterprise can access loan from financial institution is personal guarantee(s). This makes the business owners to take personal responsibility of refunding the loan at the agreed time.
5. Outstanding and debt
Any enterprise that has an outstanding with any of the financial institutions will definitely experience denial of the funding loan. Banks are very careful and doesn’t want to grant loan to any business that has outstanding arrears or debt with other lenders. So, this makes banks to withdraw their hands of funding loans from whoever is owning other lenders. This situation is termed debt-to-income-ratio and that’s a major challenge against them.
6. Concentrations of customer
Financial institutions are always careful with businesses that record their most significant sales from few certain number of customers. They are doubted by financial institutions because they may experience business failure at any time. So, a business is expected to have diverse of major customers with consistent income before it can be granted loan from financial institutions.
7. Economic concerns
Banks are also concerned about the present economic surrounding the business requesting for loan. If the economic condition at the time of requisition for loan is not favorable, the bank can not consider lending out funds to such business at that time.
8. Inadequate Management Team
During loan processes, banks looks at the reputation and future of such business before they can consider to lend the person. Therefore, any SME that desire loan from bank must ensure that. Without that, the proposal will be rejected!
9. Weakening Industry
Any SME that banks considered weak can’t be granted the loan. So, your business must be strong and firm enough before you can be considered for loan. Not a business that is not stable! Any business that tends to fold up can’t be granted!
10. Inadequate operating History
Banks usually consider any SME that has a long term operational records. History of operation is another factor that banks considered before they can award loan to customers. Therefore, SME must have recorded good numbers of success, achievement and recommendations. So, banks always request for a genuine record of operation as touching their gains over a period of time. So, the absence of good operational history will make the SME loose the funding loan. READ MORE!