If you are running a small business or planning to start one, you may find yourself needing to take out a loan to boost your capital. But applying for small business loans in Canada from banks may be harder than you think.
Banks are not always willing to lend money to small business owners. Here are some of the possible reasons why banks reject loan applications:
1. Problems with Cashflow : Do you have a positive or a negative cashflow? Your cashflow is positive if there is more money coming in than the money going out of your business. But if your business is spending more than you are earning, then you have negative cashflow in your hands.
With a negative cash flow, banks are less likely to grant you a business loan. This is because they doubt your capacity to pay back their investment.
2. Lack of Collateral : Since small businesses tend to have little or no financial records, banks often ask for collateral before granting loans. But most startups lack the resources that can be used as collateral. As a result, banks reject their loan application.
In any case, you can ask your bank about properties or assets that you can pledge as collateral. These may include houses, cars, or even business equipment. Just don’t forget that if you fail to settle your loan, you will lose whatever it is you put up as collateral.
3. Bad Credit or No Credit History : Whether you like it or not, banks will be looking into your credit history when you apply for a loan. If your credit score is high, banks take this to mean that your business is good in handling its credit and budget. Thus, you have a better chance of getting your loan approved.
In contrast, if your credit score is low or if you have no credit history at all, banks could doubt your ability to handle your budget. And so, there is less likelihood of your loan getting approved. If you want to increase your chances for a loan approval, see to it that you have a good credit history first.
4. Lack of Preparation : If your small business loan was rejected, the reason could be a lack of preparation on your part. Take note that before you apply for a small business loan, you should have a business plan ready. This includes financial projections as well as financial statements.
You will also need to prepare credit reports, including personal and business reports. Get ready to show your bank statements as well as your tax returns. You should also be prepared to present legal documents such as contracts, licenses, permits, and other matters.
Final Thoughts
Applying for a business loan from a bank is never easy. If you applied for a small business loan recently but got rejected, don’t be discouraged! There are other options that you can try.
Aside from banks, there are other lenders who specialize in merchant cash advances, online loans and other possible solutions. So keep your eyes open for these opportunities.
