In Regards To Cash Flow A Firm Should Ideally Have Top 2 Reasons For Business Loan Denials

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Top 2 Reasons For Business Loan Denials

In the past five years, there has been an increase in commercial sources of financing in the US. In particular, there has been a proliferation in the market of alternative loans that meet the needs of business owners who do not have the credit (personal or business) or operational ability to get approved for traditional bank financing. Although useful in the short term, many of these alternative sources of lending “trap” company owners into a loan structure with high payouts and abnormally high interest rates. These two factors often cause a company more damage than expected by limiting and sometimes significantly reducing free cash flow. Traditional bank financing is still the best option for business owners because of the low cost of money and flexibility to alleviate repayment and disbursement problems. In this article, we’ll focus on the top 2 reasons for business loan rejections to provide business owners with information to craft and present business loan proposals that are concise, relevant, and factual.

(1) Unresolved personal and business credit profile (high credit risk)

Most business owners and individuals do not have a good understanding of their credit profiles. Although banks have become more protected in their credit risk assessment systems, the foundation remains the credit report for consumers and businesses. It is not enough to just know your credit profile, you must also have valid explanations for any reported problems. Ideally, you want to resolve as many of these issues as possible before submitting your business loan proposal.

Your personal and business credit profile also represents the lender’s repayment pattern and is a key component of business loan approval. If credit reports show a pattern of non-payment or mostly non-payment as agreed, then the chances of being denied a business loan are quite high. One way to improve your repayment pattern is to either close unused or unnecessary lines of credit or reduce existing credit amounts such as credit cards or open lines of credit where applicable.

(2) Without a business plan, there is no evidence (high management risk)

Lenders like to see that business owners are organized and focused on their business, and a great way to show that is by presenting a solid business plan. This plan should highlight your business objectives in the Executive Summary, especially those involving the proposed loan. Often loan proposals consist of a phone call or a short conversation with the lender without any written content. Always give the lender a brief description, either disclosing the loan opportunity or a business plan that includes an explanation of how the loan funds will be used and repaid.

Also, describe the opportunity to obtain funding as a means to an end. In the past, I’ve experienced entrepreneurs offering only plans that disclosed how and why financing was needed, without going into the disclosure of anything else. To increase your chances of getting approved, give the banker a full picture of the short-term and long-term impact of the financing.

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