There is an expression that says banks only lend to those who don’t need it. Fortunately, with the arrival of an alternative source of the loan in Canada, applying for a loan online is rather easy. But anyone who has ever applied for a loan in the traditional way (ie through your local banking institution) knows how much time and effort it takes to simply apply – that’s which is less time for your business and your loved ones. After a long process and a long wait, more often than not, small business owners have their loan applications turned down without them understanding why.
In other words, banks are known to be allergic to risks. Unable to lend according to the potential of your business, banks limit themselves to seeing small or new businesses simply as risky. It’s no surprise that traditional banks routinely refuse small business loans, while online lenders like Credit flex have higher approval rates.
Whether you have endorsed your child’s university loan or changed careers, banks find a multitude of reasons to refuse your loan requests.
To simplify matters, these reasons can be grouped into three categories: first, bank analysts consider the business to be risky. Second, the collateral assets of your business are not worth enough. Finally, the personal guarantees offered are not important enough.
Here is an overview of the main reasons why a bank might refuse your small business loan:
Risks related to your business
Lack of business experience. The years of existence of your business are important for banks since they take into account 3 years of business history to determine the credit score. This is a serious problem for start-ups and start-ups that do not yet have a credit score. In the same way, if you are used to managing funds and your business without credit, it will not have enough history. If you are thinking of opening a bank account just before making your loan, neither do you think since you will not have the three years of history necessary for bank analysis.
Low credit score
- Several factors are taken into consideration when determining the credit score of a business. For example, if your business has multiple credit accounts or is being sued legally, it may have a negative credit score.
- External factors
Certain industries are considered to be less stable, and therefore more exposed to risks, which the banks are trying to avoid. More specifically, restaurants, construction companies and those describing themselves as self-employed find it more difficult to obtain financing because these industries are considered less stable.
On another level, because of recessions or unstable economies, banks may have to be more conservative in their lending.
Not enough collateral assets in the business
The value of business assets have less value than the total amount of the loan
Typical assets can include accounts receivable, inventory, equipment, and the building (if owned by the business). Things can change from year to year and the value of something that could have been $ 10,000 last year may have been reduced since then.
This is particularly evident in tech start-ups where most of their collateral is technology – computers and software depreciate quickly!
Your personal guarantees are not strong enough
Personal debt / Cash flow issues
If you have a history that your credit card payments are late, this will lower your credit score. Likewise, banks will consider you risky if your loan exceeds more than a third of your current salary. Banks also consider endorsements – if you endorse your child’s college loan or guarantee your parents’ home mortgage, it could affect your credit score.
Your current job
Your current position can also affect your credit score because the banks look at your history for the past 3 years. For example: if you have just accepted a new job, this can alert them if you are in a new industry where you have very little experience or if your salary is lower.
Not enough personal collateral assets
Your personal assets will be considered by banks as a last resort. Remember that collateral = assets-debts. Your house can be worth a million, but it only has a value of $ 200,000 for the bank if 80% of its value is encumbered by a mortgage.
Just like with a company’s collateral assets, remember that some assets may have lost value over time. For example, this Volvo in your parking lot might have been worth $ 40,000 a few years ago, but it may only be worth 10,000 now.
Although banks may have been the only solution a few decades ago, they are no longer the only option. Credit flex is there to help small business owners get a loan in less than 24 hours.