In owning and operating your business, chances are at some point; you will need to take out a loan to fund your business for various reasons. Since your business is already established, lending institutions will use your business reports to evaluate the risk. Often banks will reject your loan request after reviewing your business report. Here are four reasons banks reject your business loan application.
Lack of Confidence in the Entrepreneur
The lack of confidence in the entrepreneur is one of the most important parameters in granting a loan. If the bank does not believe in the entrepreneur’s capabilities to carry out the project or if the bank has doubts about the reputation, they won’t approve any size business loan. The entrepreneur’s profile and their attitude in contact with the bank are therefore key.
Note that the entrepreneur’s history can have a strong impact on this trust, both positively (and negatively (e.g., in the event of a past bankruptcy or delays in repayment of credit). As a business owner, you should focus on building credit and reputation from day one of opening your business.
Lack of Confidence in the Project
Above all, a project must be easy to understand, hence the importance of presenting it well, in a synthetic, structured, and understandable way for an uninitiated. The project must integrate different strategic elements, such as (attention, this list is not exhaustive):
- presence of a real need, a real business opportunity
- a real understanding of the market and the ecosystem, including the competition
- solution representing a real differentiated value proposition
- products/services validated in the market
- well-defined target audience, segmentation, and distribution channels
- adequacy of the commercial & marketing strategy for the project
- a clear vision on the planning (milestones crossed, current and future)
- complementary management team integrating the necessary skills
- The project must offer real prospects in the medium term and, if possible, in the long term
- It must be profitable enough to guarantee at least the sustainability of the activity, that is to say, to finance the necessary investments, to support growth, to repay debts, or to absorb fluctuations and unforeseen events
- All of these elements must be argued, consistent, and credible
If the bank does not understand the project, has doubts about the business opportunity, the medium-long term prospects, its profitability, and its viability, it will be very difficult to consider a loan as a reminder, “Credit” means trust.
And remember, you usually only have one chance to make a good impression. A project presented via an incomplete, inconsistent, or not yet completed file risks toast your chances with this bank. This is especially true since it is very difficult for a bank to consider reviewing its position in the event of a negative decision.
Insufficient Repayment Ability
This criterion is essential for a bank:
- If the project does not demonstrate sufficient capacity to repay the credit, there will be no credit
- To measure this capacity, priority is given to actual figures over forecasts. If these are appreciably more positive than history, it is necessary to justify them well, and they may be nevertheless not (fully) taken into account
- Also, particular attention is paid to the regularity or otherwise of the cash flow
The Risks are Excessive
It is worth remembering that a bank developing traditional business services is content to lend them the funds collected from savers or the market in exchange for a limited interest. The bank is an intermediary in managing excess and liquidity needs and does not strictly speak to take risks. Besides, it does not participate in the benefit of its customers.
- Therefore, and this is a fairly common element of confusion, there can be a strong misunderstanding between the entrepreneur and his bank on its role and what it finances
- Typically, things like the life phase of the business, the type of sector, or the innovative nature of a concept will have a big impact on risk
- It deems a starter project at risk, a new concept not yet validated in the market or worse, not yet developed, areas with high default rates, activities with legal risks and policies
- The bank also considers the maximum exposure limits it is willing to take on a business or sector
Based on these risks, the bank assesses whether it can intervene, how high and with what terms, and what protection.
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