A few weeks ago, a friend called to say how devastated he was after he learnt that his loan application was denied, he was so livid he threatened to withdraw his business from the bank. Like him, many small business owners have experienced the pain and frustration that comes with a rejected loan application, but what is equally painful is that more often than not the reasons they’re given for the rejection is often vague which means they risk being rejected again since they don’t know why their request was turned down in the first place.
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To help you avoid that, I have highlighted 4 major reasons why your business loan application may be rejected:
- Poor Credit Score – Your business loan may be rejected because your business or you as the owner have a poor credit score. A credit score is a number from 300-850 created by analyzing your credit information to determine your creditworthiness. A high credit score indicates to lenders that you have a history of paying back your loans and vice versa. This is why you must ensure that your credit score is super high. But you must first determine whether you’ve a poor credit score. To get that information you can visit any of the credit bureaus in Nigeria like CRC Credit Bureau, Credit Registry Nigeria, etc. Sometimes, even a lack of credit history can be a problem because without one banks would not be able to determine if you’re credit worthy (especially when collateral is not available) or not. So have to build up your credit score by collecting smaller amounts in loans and repaying on time.
- Too Much Unpaid Debt – When you have a lot of unpaid debt and you’re requesting for a new loan, your lenders would typically be wary of lending you money unless they can determine that you’re capable of paying up their loans. To ascertain this, they check your debt-to-income ratio. Your debt-to-income (DTI) ratio, is a measure of how much you can afford to borrow. It not only shows lenders that you can pay your loan each month, but also that you’re responsible with your money. AndIf they are not sure that their loan can be recovered then your loan request would be rejected. To overcome this hurdle, ensure that your business does not have any outstanding loans that would make it difficult for you to get a new one.
- Poor Cash Flow – We have talked about the importance of cash flow to a business but it is also a very important metric to calculate lenders use to estimate your credit worthiness. Before your loan request is approved, lenders need to be certain that your cash flow is strong enough to cover your business expenses and have enough left to pay them back. A business with poor cash flow often indicates that it is not doing very well and this can raise a red flag for banks that fear that your business may collapse without repaying their loan. You have to improve your cash flow to be able to improve your chances of getting that business loan. Learn simple tips necessary to improve your cash flow today.
- Risky Industry – Some businesses are simply more likely to default on a loan and make a more risky investment for lenders because they operate in a high risk industry like restaurants. These businesses are usually avoided by banks and other lenders because of their high risk of failure. If you operate in such industries you have to be able to provide a strong application that can convince lenders that you can repay the loan you’re requesting.
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