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8 Common reasons banks reject small business loan applications

Common reasons banks refuse small business loans
Common reasons banks refuse small business loans

When you apply for a small business loan, there are several factors that banks consider before approving your request. Often, the decision comes down to elements of your financial history, the strength of your business plan, and your overall creditworthiness. 

Below are eight common reasons banks may reject your loan application and some friendly advice on how to improve your chances:

1) Poor credit history

Banks look closely at your past credit behavior. In Nigeria the formal credit scoring system is still growing and having little or no established relationship with your bank can harm your application.

Advice: Start building your credit profile early by regularly using your account and maintaining a record of timely repayments. This establishes trust and shows lenders that you are reliable.

2) Insufficient collateral

Lenders require tangible assets such as property or valuable equipment to secure a loan. If you do not have enough unencumbered assets, banks consider your application risky.

Advice: If you lack personal collateral, explore options that allow you to use third-party collateral services or begin with a smaller loan that matches your asset base and business growth.

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3) Weak cash flow

A steady cash flow reassures banks that your business can meet its repayment obligations. Poor or inconsistent cash flow signals potential trouble and may lead to rejection.

Advice: Demonstrate healthy cash flow by keeping your business accounts active. If needed, temporarily bolster your account with additional funds to showcase your ability to cover upcoming expenses.

Your business plan largely defines your business.

4) Inadequate business plan

A clear, detailed business plan is essential. Without a well-prepared document that outlines your industry knowledge, financial projections, and growth strategy, banks may doubt your capability.

Advice: Invest time or resources in creating a comprehensive business plan or hire an expert. This plan should explain your business model, expected cash flow, and how you intend to repay the loan.

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5) Limited industry experience

Banks favor applicants who have proven experience in their field. A lack of hands-on involvement or industry knowledge can raise concerns about your ability to manage the business effectively.

Advice: Highlight any relevant experience or consider partnering with someone who has established industry credentials. This can reassure lenders that your venture is in capable hands.

6) Unrealistic loan request

Requesting an amount that far exceeds your business’s revenue or capacity can signal poor financial judgment.

Advice: Base your loan amount on realistic projections and current cash flow. It is wise to start with a manageable sum and consider increasing your request as your business expands.

7) High industry risk

Certain industries face volatility or regulatory challenges that make them riskier in the eyes of banks. Lenders may reject applications from high-risk sectors even if the business itself appears sound.

Advice: In your business plan, clearly outline the risks associated with your industry and provide detailed strategies to mitigate these risks. This proactive approach can help convince banks to consider your application.

8) Excessive existing debt

A heavy debt load increases the risk of default, and banks will be cautious about lending to businesses that are already overburdened with obligations.

Advice: Be transparent about your current debt and work on reducing it before applying for additional financing. Maintaining a healthy balance between debt and income is essential for improving your credit profile.

FURTHER READING: 6 Nigerian banks provide over ₦77 trillion in loans to businesses across Africa

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