When it comes to your business expansion, you need two things: an idea and financial backing. For some, the second of these might be more challenging. Your financial assets might already be invested in other projects that prevent you from using them in expansion ideas. However, without those business funds, you can’t grow. You might, therefore, try to secure one or more business loans, but this isn’t always successful. Banks can turn you down for a business loan for a number of reasons. Here are some of the most common.
1. Limited evidence of cash-flow
One of the first things that a bank will look at is your cash flow. If you haven’t been operating long enough, you might not have the data to demonstrate that you can generate an income. This makes it a risk for banks to lend you money. The same thing applies if you’re not an established business. To banks, the longer you’ve been in business, the less of a risk you are.
2. You ask for too little
Surprisingly, asking for too little money can be your application’s downfall. While the risk is smaller, the value to banks considering the costs of administrating small loans is too high. Typically, banks will consider any business loans under £100,000 to be small.
3. Debt utilisation is too high
Banks will calculate the total amount of debt your business can safely sustain. Banks don’t want you using more than 30% of the credit available. This is known as your debt utilisation. If you’ve already got business loans of about 30%, they’ll see you as a higher risk and reject your application.
4. Your debt utilisation is too low
Ironically, if your debt utilisation is too low, you can also be seen as a risk. This might mean that you have no debt already or no history of using credit responsibly. This can be infuriating, but it’s about your experience; if you haven’t shown you can repay credit, they aren’t going to trust you can take credit on.
5. Your industry is too risky
Banks want to ensure loans can be repaid. Therefore, they’ll avoid riskier industries. One example is restaurants and cafes, which have a 60% first-year failure rate.
Turned down for business loan – where to find out more
Even if your loan application is rejected, there are other finance options available to you. Instead of buying equipment and vehicles, you could try leasing them or you could look at alternative finance options that will help you grow your business from strength to strength. We can help, take a look at our business finance section to find out more. Or get in touch if you’d like to discuss how we can help. We have access to alternative finance providers and can help with short-term business loan to help you achieve your business expansion goals.