Investments and bank loans are convenient ways to pull your business out of debt or expand your business towards horizons where your investment might never take you. If you face cash flow problems, you might want to apply for a bank loan to resolve the issue. Several types of loans can help you get your hands on some cash, but some of them are for small businesses. Their financing system differs from that of the more prominent companies; therefore, an average bank loan would not suit them.
You must be careful with the type of loan you pick depending on your business because the loan’s purpose usually differs according to business size and style. You might need money to boost your start-up, buy inventory, or solve liquidity problems as a small business. The sum is also not usually considerable, and the interest should be practically payable depending on the company. 
However, it isn’t all so straightforward. Banks often reject loans for small businesses because of credit analysis principles.
Most banks and investors follow the rule of the 5Cs of credit analysis, including Capacity, Capital, Condition, Character, and collateral. While these five Cs are not a part of some internationally acclaimed strategy, bankers worldwide consider these to sanction or disapprove loans for small businesses.
Here are the five reasons explained why banks reject loans for small businesses.
Not Having a Hopeful Cash Flow Balance
Cash flow statements are imperative for applying for a bank loan. For an investor to approve loans, there must be cash-flow statements from the past and present and those based on future projections. These cash flow statements provide a clear insight into the business performance in recent history, areas of strength and weaknesses, and the potential for growth in the coming years.
Investors and lenders usually require a cash-flow projection of at least three years to lend money to the business. It is imperative to have updated financial statements, including cash flow, income, and balance sheets, to convince lenders of your business’ capacity.
Not Having Enough Capital to Cover the Debt
It accounts for the total amount of personal investment, earnings retained, and any other controlled assets under the business owner’s name. The capital is primarily viewed as an alternate source of making money, either by liquidating these assets or using them as guarantees. Usually, banks measure the capital as a percentage of the total investment cost. It is more of the lender’s security: the higher the capital, the higher the chances for banks to sanction the loan.
Unfavorable Economic Conditions
These refer to the conditions of the loan sanction itself. They account for economic fluctuation, changes in currency rates, deflation and inflation, and any other factors contributing to the loan deal’s monetary aspects. In addition to these economically dependent conditions, lenders consider interest rates, repayment schedules, and span, as well as principal amounts. The requirements make a formal part of the agreement once the loan is approved.
A Poor or Defaulting Credit History
The borrower’s previous credit history and track record with loans, debts, and payments. The character directly reflects on the borrower’s reputation in financial dealings and speaks for reliability and honesty. This assessment can be both qualitative and quantitative. In quantitative measures, the character can conveniently be judged by the repayment schedule as promised in previous credit records and credit history score through third-party analysis.
Qualitatively, this includes the borrower’s connections and reputation among the business circles. Banks put a lot of weight on the previous credit history and character. If, by any chance, the borrower has filed for bankruptcy or was unable to make repayments as per the schedule, he is less likely to get the loan sanctioned from the bank.
Having No Collateral or Asset to Guarantee
It includes any personal guarantees or assets nominated by the borrower in the deal. You can consist of savings or any other investments for individuals. For businesses, collateral includes equipment or assets owned within the premises and any receivable payments in the business accounts. The ease of liquidation by banks usually measures collateral.
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