Recent surveys have shown that even though there are more business loan options available in the market, small business owners are still struggling to gain access to capital.
The problem with having so many SME financing options is that, some SME owners do not understand how some of the SME financing products work.
Also, of the business owners who have applied and got rejected, most of them do not know why their business loan application did not get through.
They keep trying and trying but to no avail, and this can be a very frustrating problem.
1. Insufficient Cash Flow
One of the main reasons that cause a business loan application to be rejected is due to insufficient cash flow.
All institutional lenders want to know that your business has enough cash flow to maintain the monthly repayments, on top of all other expenses.
Therefore, it is imperative to ensure that incoming revenue is more than the outflow.
2. Business Too Young
TV shows like ‘Shark Tank’ have created the illusion that it is always easy for startups to get funding.
In truth, institutional financiers usually favour companies that have been in active operations for at least 2 years, so they know that the business has reached to a certain level of stability.
Please understand that it is NOT impossible for startups to obtain funding.
There are many viable options around – with equity crowdfunding platforms, venture capitals, or even private investors.
3. Too Much Liability
Institutional lenders are always afraid to lend to businesses that have a lot of liability.
Lenders don’t like competition, where it can cause a lot of problems in the event of a default.
Always ensure that your business’ liabilities are kept as low as possible.
It is also important to always ensure that repayments are made on time.
Any late payments can cause significant damage to the credit rating of the company.
4. External Market Conditions
Most people do not know that general market conditions are a major factor in the role of credit assessments in any financial institution.
From month to month, the bank issues a list of industries that they avoid lending to – depending on their view of a particular industry.
For example, when the construction industry in Singapore slowed down, most of the banks started avoiding business loan applications that came from construction companies, for fear that the slow down in business might affect their ability to make timely repayments.
Be sure to have a good general feel of your industry. If you know that a slow down is about to happen, get on that SME loan application earlier.
The extra funds could well turn out to be the life support that pulls your business through the dry spell.