Every day the credit departments of banks and other lending institutions receive tons of applications from businesses and individuals for loans to fund their start-ups, expand existing business, use as working capital or for some other purposes. The bank, like all other institutions and individuals, has limited funds. Yes limited funds, and for that reason they have to scrutinize all loan applications so they lend to only those that can repay the funds. Here are some reasons why loan applications are rejected.
Telling the bank that you have an asset to secure against the loan is not enough. Banks lend against future cash flows not against the sale of your asset in the future. In any case, if you have an asset that you are so willing to dispose, why not sell it and use the proceeds to fund your business? If your cash flow projections are weak and/or insufficient the bank rejects your loan.
The competence of the management or managers of the borrowing entity is equally important. When a bank lends you money, it does so trusting that the managers of the business would be able to apply the funds judiciously towards the purpose stated in the loan application without diverting it for personal use. If your past records show that you cannot manage cash well to generate enough returns to pay off the principal and interest, your loan application is rejected.
Are you wondering how the bank finds out about your character? Your credit history shows your character. In practice, Character refers to your credit history, and how you or your business has also always performed in regards to previous loans taken and other financial obligations. Repayment of previous loans is not enough. Paying them on time, that is, when the payment obligations were due is what matters. Poor credit history means your loan application is rejected.
If you are requesting for a loan, the bank expects that you would also contribute some amount towards the purpose of the loan or your business. For instance, showing that you have contributed only $10,000 whilst asking the bank to lend you $500,000 would require a lot to get your loan approved. Insufficient equity contribution in itself could get your loan application rejected.
Conditions in the operating environment of your business must be favourable to get your loan approved. If an environmental scan shows dwindling demand for your service or products, outdated technology you are using, expected major industry shake-up, etc your loan application can be rejected.
Here are recommended guidelines for getting your loan request approved.