5 Top Reasons Why Your Business Loan Application Was Denied

Lenders are smart people and so are investors and other financial institutions. They would not like to lend or invest in a business that they are not sure what its fate will be in years to come.

An entreprenuer frustrated due to several loan application denials

It is important to note that these people consider so many things before ever thinking of borrowing money to you as a startup. It is important to note that even if you apply for a loan from your relatives, they would also consider these same factors maybe with a little variation.

We would be looking at some of these factors that are considered by lenders and other financial institutions before they lend, borrow or invest in your startup. These people are very cautious and a little weak area found, could render your application futile.

These factors are also known as the five C’s of credit.

Reasons why your loan applications are not granted

 1. Character: every lender wants to lend money to someone with reputable character. You might be saying: has he done anything with me before? Does he know who I am, etc.?

But the truth is that they go extra miles to find out your history, how you treat your employees if your business has been operating for a while, the way you take responsibilities, your educational background and possible training you have had on the job, the quality of those who referred you to them, your trustworthiness, etc.

In summary for this point, they tend to check your honesty, integrity, trustworthiness, managerial skills, your relevance in the industry or niche, location, and character judgment.

 2. Capacity: lenders look at your primary source of repayment, your repayment plan, the cash flow of your business, duration, your previous payment history, etc.

They also want to know how you intend to pay the loan if your primary source of repayment fails how your business can handle any unforeseen circumstances that might lead to a fall in cash flow, etc.

  

3. Capital: you might be saying: how does this affect me? It really does because a lender would like to know the amount you as the owner of the business have invested in the business. They expect that you should contribute to the business and this is seen as a sign of seriousness and eagerness to work. 

If your company has not recorded any profits, they would like to see your customer base and payment history, your equity, total debt, the value of assets, and permanent working capital.

4. Conditions: lenders would like to know the present condition of your business and how a change in some economic, social, religious and political sectors would affect the business. For instance, if you wish to start a Pig farm in a place where their religion is against pigs, then be rest assured lenders would not be interested in investing in your business.

5. Collateral: of course we all know this point. Lending collateral means that you show pledge your asset such as car, house, lands, manufacturing equipment, offices, marketable securities (shares and bonds), guarantees, etc. that will be an alternative source of repayment if the business fails or you are unable to repay before the stipulated time. 

This might not be required by some especially when your business is a service-based business. But for this to be waved, then you have to show some impressive track records.

Conclusion:

If your loan applications are rejected always, then you might want to consider these factors before applying for another. Make sure you meet these requirements and I bet it will be granted. In subsequent posts, we would be sharing some sources of funds for your business that you might not have considered.