Why banks won’t lend to a business

How to obtain financing is a common concern for new businesses and those preparing to scale.

Getting approved for a business loan or line of credit is more difficult than qualifying for a personal loan. It’s crucial that small business owners are adequately prepared to meet with a lender to present their business in the best possible light and qualify for the money they need.

Here’s what you can do to streamline the loan approval process for your small business.

Your business risk profile

One of the most important parts of any business loan application is demonstrating to a lender that your company is able to make regular payments and repay the loan in full. If your business is profitable, you can show you’re a low risk by presenting cash flow statements, a detailed business plan and, of course, your good credit history. Some of the most common reasons a bank won’t grant a loan to a small business are a lack of security (e.g. no business assets), a poor or non-existent credit history, business inexperience and/or a weak business plan.

Know your credit score

It’s highly recommended that you review your credit score before you apply for financing. That way you’ll know whether it might be better to wait until you’re in a better position to qualify. Check that your report is complete or free of any errors that can affect your score. Your credit report includes your payment history for credit cards, equipment leases, mortgage or office rentals, electricity, phone fees and other business expenses. A simple omission – say your internet provider, whom you always pay on time, isn’t included in your payment history – can result in your credit score being lower than it should be, so be sure to correct any errors immediately.

Before you apply for financing

If you suspect a lender will decide your business is too high risk for a loan, or you’ve been denied financing, apply for business credit instead. Your spending limit may be low to begin with, but a credit card will give you that opportunity to build a good credit history. Pay off your balance – or, at the very least, make your minimum payment each month. Keep up with your other financial obligations, too, such as any personal loan payments, rent, leased equipment and any income taxes owing. Apply for a loan in six months to a year and you’ll have a much better chance of approval.

Before you apply, be sure you have all the documentation needed to support your loan application. Include in your portfolio copies of business banking statements, financial reports, a detailed business plan including projections and a well-researched marketing plan.

You should also be prepared to discuss with a lender why you need to borrow the amount you’re asking for, the length of term and how your business can afford to repay it. Make a strong case for funding by demonstrating profitability, a good credit history and a solid business plan, and you’ll be in an excellent position to qualify for the funds you need to grow your business.

Allan Hall named finalist in numerous firm-wide categories

Allan Hall Business Advisors continues to impress with individual, network and firm-wide awards and accolades, with our latest nomination as winner of the Client Choice Awards 2020, Women in Finance Awards 2019 and HR Manager of the Year 2019. For further details and a full list of our recent awards, click below.

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Allan Hall Business Advisors is an integral member of Alliott Group, a growing alliance of 170+ accounting and law firms in  across 70+ countries globally. As part of this alliance, we can connect with like-minded members of Alliott Group in other jurisdictions to support and advise our clients who are wishing to explore and develop business opportunities both locally and internationally.