After the massive economic shock caused by the pandemic, and the slowdown of the economy, banks, private lenders, and credit unions were far too skeptical to dish out loans, anything from mortgages to small-medium enterprise loans.
Yet, after much prevails during the last two years, with the economy now moving full steam ahead, bank approval rates are still not as high as they were roughly two years ago.
Approval rates have come down almost more than half in the last two years since the start of the pandemic. The latest figures reveal that in December 2019, approval rates from big banks, and smaller banks were 28.2% and 50.6%, respectively. In December 2021, the same financial lenders approved roughly 14.2%, for big banks and 20.1% coming from small banks.
More alarming, institutional lenders had a two-third approval rate, around 66% in December 2019. Back in 2021, that figure fell to 24.9%.
Banks and credit unions are now pulling back on rampant SME loans, as they look to brace for turbulent economic conditions lying ahead.
Yet, the more than 32 million small and medium businesses in America have quickly become the backbone of the macroeconomy, sustaining millions of jobs and fueling the economy.
Business owners are perhaps already well-aware of the current challenges they’re facing, as consumers are becoming more cash strapped as inflation runs rampant.
While many businesses do seek financial relief, whether through the Paycheck Protection Program (PPP), or financial aid from traditional lenders there is a chance that lenders can deny applications for various reasons.
There’s a list of things business owners should know before they apply for a business loan. Understanding why lenders can be so meticulous when it comes to the business loan assessment process will help one better understand how to overcome these types of challenges.
Here’s a look at the five mistakes that are making it harder for business owners to secure an SME loan.
Business Credit Worthiness
One of the first mistakes business owners need to overcome in order to secure a loan is to ensure that their credit and financial situation are up to scratch. Even the U.S. Small Business Administration (SBA) lists it as one of the number one reasons why business owners are oftentimes denied loans.
Business owners should ensure that their credit reports and credit scores are up to date. Furthermore, any previous financial conditions, regarding taxes, liens, garnishments, and bounced checks should have valid reasoning during the application process.
The best thing any business owner should do, before applying, is to address any of these disputes and problems beforehand. This will help to give lenders better insight into current and past financial conditions.
Improve Personal Credit
Another reason why lenders could disapprove a business loan is because of bad personal credit. According to a recent survey by Goldman Sachs, nearly 70% of business owners mentioned that personal credit was a defining factor for them when they applied for a business loan.
Bad personal credit or a low credit score could still land you a business loan, but this would come at a higher interest rate and additional fees.
Juggling a robust credit score, both for a business and for yourself is one of the easiest ways to secure a business loan, especially at a time when interest rates are only set to go up in the coming months.
Financial Limitations In The Business
Several financial limitations can make it harder for business owners to successfully secure a loan. From bad business credit, limited access to venture capital, inflation, and low cash flow could become determining factors for the borrower.
In most cases, it’s advised that business owners consider what their current financial situation may be, and how they can improve it before applying for a loan or credit.
Whether it's improving business operations to increase cash flow, or even taming inflation by adjusting prices according to the consumer price index, there are different strategies every owner can use that will suit their business needs.
Inexperienced and Tender Business
In some instances, lenders can look at how long a business has been operational before they accept or approve a loan application.
While some entrepreneurs and business owners may enjoy a sudden growth spurt in their business, it’s not necessarily to say that this will reflect positively when they seek additional financial aid or relief.
Depending on where a business is registered, or operating from, some states, and even financial institutions, and credit unions will not accept a loan application if a business hasn’t been operational for at least two years.
There are instances where a lender will accept an application, even when the business has been open for less than the specified time, but this comes with higher interest rates and fees. The overall process of this can also take weeks, sometimes months to receive approval, so it’s advised that business owners consider whether this route is worth the administration and wait.
Uncontrolled Gearing Ratio
The gearing ratio refers to the amount of current business-related debt, concerning its physical equity capital. This means that when a business has more debt than equity capital, its gearing ratio tends to be higher.
Lenders will always consider the gearing ratio before they approve a loan application. So business owners need to control and manage their credit limits and their reasonable debt usage.
To lower the gearing ratio, it’s advised that business owners use their credit more responsibly, and ensure that all the equity capital or assets are kept in line with the level of business debt.
These are only a few of the most common things that make it harder for business owners to properly secure a small-medium enterprise loan.
Alternatively, some other mistakes or problems can keep a business owner from having access to financial capital - these include:
- Missing information in the application.
- Insufficient financial information was provided.
- Limited collateral in the business.
- The loan amount is too high or too little.
Securing a business loan can help any business owner finance their business needs and ventures. It’s hard to sometimes understand why a loan is not approved or why applications will get denied, well before the loan process has even commenced.
So far, these are among the most common mistakes business owners tend to run into when they apply for a small or medium-sized business loan.
Business owners should ensure that they meet all the requirements and that both their business-related financial condition is well-organized. By simply ensuring you meet the basic prerequisites, it may already help fast-track the loan application.