Small businesses are constantly at a disadvantage when seeking funding from the banks. WHY?
Because the banks require collateral 100% of the time for loans under $1 million, but that percentage dropped to 63% for loans of $100 million. Similarly, personal guarantees are typically required for loans below $5 million. If your business cannot provide equipment, buildings, inventory or accounts receivable, the bank has minimal options to secure repayment of the loan, making your deal unattractive. Typical reasons funding from banks can be rejected are:
1. Unstable cash flow; for some seasonal businesses extreme cash flow highs and lows make fixed loan repayments unpredictable
2. Insufficient security: banks requirement for collateral to secure the loan is mandatory to satisfy risk management
3. Overload of debt: the banks have lowered their risk debt exposure to small business making it considerably harder to obtain an approval
4. Uncertain credit risk: banks are reluctant to fund untested or new markets, as they always use industry standards and benchmarks when assessing risk
5. Insufficient trading history: banks want confidence that the business is managed efficiently and can prove capacity to repay the loans
6. Untested business model: establishing a viable business model takes time and the banks are not willing to take the risk with you
7. Weakening economy: if current economic conditions are weak the banks factor this in and tighten their credit criteria in the event of foreclosure.
8. High-risk industry: if a bank believes you are operating in a “risky or weak industry” then you are less likely to have your application approved
9. Unclear market growth: banks are not venture capitalist or innovation risk takers and would not fund an emerging market until supply and demand is proven
10. Poor management: banks look for a strong and diversified management team to implement the business plan to achieve its projected revenue