Discover Insider Tips To SME Business Loan Rejection Reasons That Banks Won’t Tell You.
Applying for a business loan can be a great way to finance your company’s growth, but it’s not always easy to get approved. There are several reasons why your business loan application may be rejected, understanding these reasons can help you avoid them and increase your chances of securing a loan.
These are the possible reasons for your SME business loan rejection:
1. Incomplete Documents
One of the most common reasons why a business loan was denied is due to incomplete documents. It is essential to ensure that all documents required by the bank are provided in full.
2. Bad Credit History
Lenders will review the director’s personal and business credit scores to assess a SME’s creditworthiness. A bad credit rating or a history of late payments and defaults may lead to your loan application being rejected.
3. Poor Financial Statements or Records
Banks typically require financial statements, such as profit and loss statements, balance sheets, and tax returns, to assess loan applications. Inaccurate, incomplete or poor financial statements are some of the possible reasons why your business loan got rejected.
4. Low Revenue
Banks may reject loan applications if the business does not generate enough annual revenue to cover the loan repayments which makes the borrower a high-risk candidate for lending institutions.
5. Low Daily or Monthly Cash Balance
Bank statements provide a glimpse to the overall health of a business, your loan application may get rejected if the business does not maintain a healthy daily or monthly end cash balance. For small businesses, it is suggested to maintain a minimum month-end balance of ten thousand to twenty thousand dollars; however, having a higher month-end balance in comparison to the loan installment increases the likelihood of approval. This demonstrates to the lender that the business has the ability to repay the loan.
6. Inadequate cash flow
Lenders want to ensure that you can meet the monthly loan repayments. If you have poor cash flow or are unable to demonstrate that your business can generate sufficient revenue, it could result in a rejected application.
7. Applied to the Wrong Bank
Each bank has its own lending criteria and may specialize in certain types of loans, they may also have strict requirements for the type of businesses they want to finance or the loan terms they offer, which means that not all borrowers will qualify. Applying to the wrong bank may result in your SME loan application being rejected.
8. Industry Risk
Lenders may reject loan applications for businesses operating in industries that are perceived to be high-risk or volatile. This can include industries with high failure rates or those affected by economic downturns. For example, the Covid-19 pandemic has led to numerous businesses closure in the construction, F&B, and retail industries.
9. Excessive Debt To Equity Ration
SMEs with a high debt-to-equity ratio may be seen as a risk by lenders due to their existing financial obligations. This might lead to a loan rejection or approval with unfavorable business financing terms.
10. Hit Banker’s Credit Limit
If a specific bank has already extended the maximum amount of credit to a borrower, they may reject any additional loan applications. We advise business owners to get business funding and financing options from new credit sources such as other banks and financial institutions and take chance to build new relationships with them should business opportunities arise.
11. Lack Of Collateral
If the business already has a large exposure to unsecured loans, banks will typically require a form of collateral as security for the borrowed amount. If your assets are insufficient or lack the necessary value, your loan application may be denied.
12. Business is Too New
Lenders might be hesitant to approve your loan application if you are a startup or your business is relatively new or has a limited operating history. Generally, lenders require companies to have a minimum of 2 years of operations to get a small business loan approved in Singapore.
13. Pending Litigation
Banks view pending litigation as a risk as a litigation loss may result in monetary compensation which can hurt the business’s finances, this is one of the possible reasons why the business loan is rejected. It is recommended to apply for a loan after the litigation is concluded.
14. Director High Personal Debt-to-Income Ratio
A high debt-to-income (DTI) ratio reflects that a significant portion of the director’s income is spent on repaying existing debts. This can be a red flag for lenders if the director acts as a guarantor and may indicate that the director is overextended and has a higher risk of defaulting on additional loans.
15. Partner’s Poor Credit Rating
A partner with personal credit issues whose name is not in the loan application may also affect the loan approval, it is recommended to buy out the partner with a poor credit score and then apply as a single director or bring in an additional guarantor with good personal credit score for the application.
16. Bankruptcy
Bankruptcies, defaults, and foreclosures in the borrower’s financial records indicate a history of financial distress and inability to meet their obligations. It would usually take 5 years from the date of discharge for the director to be eligible for a loan again.
What You Can Do If Your SME Business Loan Application Is Rejected
If you have already been declined by one bank, it is not recommended to submit any more applications before identifying and addressing any issues that may have contributed to the rejection. It’s important to keep in mind that the same bank that rejected your application typically will not take in a subsequent application within 3-6 months of the latest rejection.
This is where an experienced SME business loan broker can come in handy, as they are well-versed in banks’ credit criteria, can quickly identify critical issues that need to be addressed, and match you to the right bank that favors your business profile. Working with an experienced loan broker can help you find the right lender for your business and increase your chances of securing a loan.
