Rejection is difficult to accept — more so if it involves money — case in point: a denied business loan application.
Your effort and time spent preparing the requirements for what you assumed was the best loan and waiting anxiously for the bank’s approval went to waste. It makes you want to request a clarification of all the business loan rejection reasons.
But you don’t need to go berserk to try and reverse the bank’s decision. Cooler heads prevail, so let’s try to understand the common business loan problems and how to fix them.
Common Business Loan Problems You Should Avoid
1. You have insufficient income
It does not matter if you have enough money in your account. Lending companies and banks in the Philippines will reject your business loan application if your income cannot sustain the monthly loan repayment. They also oblige borrowers to meet a minimum monthly or annual income requirement.
Before signing that application form, check the lender’s minimum income requirement where you filed your business loan application. In case you forgot the check the requirements before applying, do it now and determine if your income documents match the bank’s requirements.
2. You’re asking for a higher amount than what you can actually pay
Another common business loan problem is when you ask for too much. The total amount you asked in the “desired loan amount” field of your business loan application could be one of the reasons for the bank loan rejection.
You might have requested an amount that is too high than what you could pay back.
Avoid making this mistake the next time you apply for a business loan. Instead, use the bank or lender’s online loan calculator to calculate the loan interest and monthly payments.
Doing this will allow you to check how much you can borrow based on your income. Apply for a lower total on your next application, even if you believe you are eligible for a higher one.
3. You have unsettled debts
On the other hand, a considerable amount of debt in your credit history comes off as a major red flag to banks and lenders alike. Are you currently knee-deep in any debt? Then you should not apply for a business loan.
Your bank will deny your application once they find out your debt is too high relative to your income. It will help if you keep your debt-to-income ratio low to prevent the rejection of your business loan application.
To calculate that ratio, divide your monthly debt by your gross monthly income. If it is too high, consider suspending your loan application until you have paid off at least a portion of that debt.
4. You have a bad credit score
Remember that good credit standing is important to an efficient and successful business loan application. Most borrowers with stable jobs and high salaries are often shocked when bank rejects their loan applications.
They do not realize that other factors impact their likelihood of getting approved for a loan. Banks and lending agencies will look at your credit score and credit history to identify if you are worth lending money to.
On top of that, your credit score reflects your behaviors as a borrower, such as maxed-out credit cards and loan defaults.
In other scenarios, errors in credit reports cause your credit score to drop. For instance, loan payments could be mistakenly reported as late, or closed loan accounts or credit cards still appear open.
Therefore, if the bank declines your business loan application, check your credit report and credit score for any errors. It’s essential to clear your records to strengthen your chances of a business loan approval in the future.
5. You don’t have sufficient collateral
Small and medium-sized businesses can be perceived as a risk to most lenders and banks. Not all business loans will need collateral, but it would be totally needed if a business is borrowing against an asset.
Your business loan could be denied without secure assets like property, inventory, or equipment as collateral. This is one of the most challenging business loan problems Filipinos experienced today.
Like a business entering the market, leveraging collateral can prove your dedication to the business while also reassuring the lender. Using your personal assets, such as a car or house, as collateral can lower the loan’s interest rate.
Also, if personal assets aren’t an option, you may need to search for other sources of financing.
6. Poor business performance
The final and most common business loan problem is poor business performance. Lenders may be cautious about giving a loan to startups with low revenue due to concerns about the business’s capability to pay back.
The solution for this business loan problem comes back to limiting your debt and improving your cash flow. Ensure you have updated financial statements, so the lending decision is not skewed by wrong information.
If you were deprived of a business loan and think it may have something to do with your business’s performance, we recommend talking to your banker and asking them if there is anything you can do to improve your loan application.
You might want to consider being flexible about the amount you are asking for. In some scenarios, you may be permitted for a small amount than you asked. That can be disappointing at first, but it could be enough to meet your business’s needs without putting too much financial pressure on the amount of debt you must pay back.
Building a relationship with a banker can go a long way. Also, as your banker gets to know your business, its performance, and its history, they can offer guidance on what types of financing suit the goals and needs of your business.
Final Thoughts
You see, taking out a business loan can be complicated and tedious for most business owners. These are some common business loan problems your startup might encounter when applying for a loan.
Mikka Montero, a financial journalist from Allthebestloans.com, believes that if you get turned down by a bank, you can turn to companies that provide loans online, especially if you do not need a large amount.
Depending on the specific financial situation of your business, particular loan types may be better options than others. Always do your research before applying for business financing.