Business loans are often desirable due to the comparatively lower interest rates than the alternative financing options. However, there are certain factors that make bank loans inconvenient for small businesses, like late approvals and a long list of requirements and funding policies. Hence, small businesses face multiple challenges in getting a bank loan approved. 

Primary reasons why banks, mostly, do not approve loans to SMBs(small-medium businesses):

      Low Credit:

      Banks highly consider a trade’s credit scores to approve a business loan to an entrepreneur. Businesses with a credit score less than 720 are less likely to get approval from banks. Credit requirements can act as one of the biggest challenges for newer businesses or start-ups, with poor or no credit history, to get a loan approved. In such cases, banks mostly consider the personal credit score of the trader. But, if the entrepreneur is young and doesn’t have enough personal credit as well, then there remains no scope for loan approval. 

      No Collateral

      Banks turn down loan applications of businesses that already have a considerable amount of unresolved prior debts, from other loans or LOCs(Lines Of Credit). Ideally, to get loan applications approved, entrepreneurs need to have low balances on lines of credit, less than 35%, which most small businesses are unable to maintain.

      Weak business plan

      Small entrepreneurs often have non-specific and poorly-researched business plans. This can lower the chances of getting business loans approved, as banks are never ready to risk investing in a company with no strong strategical plans or approaches.

      Inadequate or inconsistent cash flow

      It is quite difficult for a business to get a bank loan if it is facing cash flow problems. Businesses with insufficient or inconsistent cash flow are often considered risks, by banks, as they get unsure about the capability of the trader to repay the amount. 

      Analogous Clientele

      Preferring diversity in a business’s clientele, banks are often incredulous of trades that get their maximum sales from only a particular number or the same set of customers. 

      Personal guarantees

      Banks often ask for personal guarantees from the borrowers, who need to be personally responsible for repaying the amount in case the business is unable to fetch enough money. Often, the personal financial condition of a small entrepreneur is not good enough to make him/her a personal guarantor.

      Lack of operating history

      Small businesses that do not have a strong management team with strong leadership attributes with a noteworthy chain of command are less likely to gain the trust of banks, which are often be concerned about the organizational integrity of the businesses.  

      Weakening industry

      Before sanctioning a business loan, banks also consider the particular industry, the borrower is planning to get into or already thriving in. SMBs trading in declining industries might face difficulties in getting bank loans approved.

      Lack of Experience

      Experience is always the best teacher, especially, in the case of trading. A substantial experience tells an entrepreneur what to expect, makes them aware of the inevitable challenges on the journey, and teaches the tricks to cross those hurdles. 

      However, there are still chances of getting bank loans for SMBs, if they understand the common business denial reasons and make sure they comply with the above criteria. Otherwise, one can opt for popular alternative financing options like Merchant Cash Advance(MCA), Business Line of Credit(LOC) and Invoice Factoring, which have less stringent policies compared to banks and also offer quick approvals and same-day fund disbursement.