Why your bank will not approve your loan application
According to an article published by Rappler, “Loans for MSMEs rose to P459.48 billion in Q1 2016.” To put it into perspective, in the first quarter of 2015, loans for MSMEs is about P427.04 billion. Thus, we see a 7.6% growth in 2016. There’s no doubt, small- and medium-sized businesses in the Philippines are now having better access to capital compared to a few years ago. However, this figure is still small compared to what other developing nations are enjoying.
Not all business owners are fortunate enough to get their bank loan application approved. This is evident when you consider how the Bangko Sentral of Pilipinas (BSP) was unable to make banks comply with the Magna Carta for MSMEs. The banks just opted to pay the fines.
Here are some of the reasons business loan applications get rejected.
Poor business credit rating
Of all the factors that affect your business loan application, your credit rating plays the most significant part. Think of credit score as your report card in school. It tells you, your business partners, banks, and other financial institutions whether it is worth risking their money with you or not.
According to Investopedia, your credit score may be “based on [your] company’s credit obligations and repayment histories with lenders and suppliers; any legal filings such as tax liens, judgments or bankruptcies; how long the company has operated; business type and size; and repayment performance relative to that of similar companies.”
Lack of accurate financial records
It is not enough to just present the financial records or financial statements of your business to the bank. You must ensure that they are accurate. If they contain inconsistencies or they look doubtful, your loan approval may be delayed with additional questions from the bank or even rejected outright.
According to the Small Business Administration, the typical documents and information required for bank loans may include business credit report, income tax return, financial statement, bank statement, collateral, and other legal records
Absence of an organized document management system
Having an efficient and reliable document management system is crucial to every business. According to an article published by The Balance, Document management “is the process of handling documents in such a way that information can be created, shared, organized and stored efficiently and appropriately.” The main goal of managing your documents is to ensure easy accessibility and convenient updating as needed.
Banks will require a lot of information from you before they can fully evaluate your loan application and arrive at a decision. The longer it takes for you to locate and submit the required information, chances are your application will get buried under applications from other companies who are able to quickly provide the required information and documents.
Not having complete information/knowledge about your business drivers
According to Techopedia, “A business driver is a resource, process or condition that is vital for the continued success and growth of a business.”
As a business owner, you must be able to identify the business drivers of your company. Depending on your business, some of the examples of business drivers include technological innovation, high-quality products, top-notch customer support, and effective marketing strategies.
It is also worth noting that there are favorable and unfavorable business drivers that are not directly under your control. For example, a flourishing economy is a good reason for a bank to approve your loan. However, if there’s a low demand for your products because of a changing market environment, then that can be a reason for banks to reject your loan application.
Not enough cash flow
Before a bank approves your loan application, they need to determine whether you have enough money to pay them back or not. If they see that your business has more expenses than revenues, approval is not likely. Evaluate your monthly cash generation to see if your business is sustainable on the short-term. Project cash flow into a longer horizon as well.
Not having enough or right experience
While it is not always applicable, but in general, the longer your business exists, the more stable it is. That’s why startup businesses may have a more difficulty applying for business loans compared to seasoned businesses. Track record is valued by banks.
Lack of feasible business plan
In an article by Entrepreneur, they advise, “to make sure that you loan is approved after it’s been submitted, make sure that you have an updated and thorough business plan that demonstrates that you’ve conducted research, proves that you know your customers (or at least potential clients), has a clear mission statement with goals in place, and contains a calculated estimate of sales and profit projections.”
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