Didn't get the stamp of approval? Find out here why banks typically reject loan applications
Many entrepreneurs looking for bank loans have been turned away. There are many reasons why banks reject loan applications; some are easy to fix whilst others may take a substantial amount of time and energy.
Your ability to repay
The worst case scenario for a bank is losing the initial capital lent to you. For this reason they need to be absolutely sure you can repay the loan amount. Applying for a loan on the back of a big sales order is one way of doing so. If you can’t do this, you need to demonstrate the money will be invested in ways that are likely to produce a decent return. The bank may wish to know more about your management team, their experience and how they will use the money to make a profit.
Your ability to make a profit
Banks aren’t charities; they lend you money in order to make more money in return. If they are not confident you can make a profit on the loan amount then it’s unlikely they’ll give you the money. This is why it’s important to clearly demonstrate precisely what the money will be used for, when it will be used and how it will make a return. You need to get the bank manager on your side; if they are convinced you’ll be able to make a profit then you’re getting close to success.
Your business model/plan
Bank managers must be convinced of your overall business strategy as well as the reason you need investment. If your business model isn’t sound then this can have a knock-on effect to the bank manager’s confidence in any part of your application. Business acumen is essential to success; your bank manager needs to think you’ve got it, and your business model is one way to tell. Make sure yours is solid and commercially viable before you head to the bank.
Too much risk
Banks are wary of investing money in businesses that pose too much risk. Removing as much risk as possible is often key to securing a bank loan. Take out adequate insurance, have back-up plans and do all you can to assure the bank manager that your business model has many different chances of succeeding. Too much risk is one of the commonest reasons for turning down loan applications, so ensure you’re got everything covered.
Your demeanour and presentation
Bank managers must have confidence in your ability to deliver as well as in your business plan. If you show up late, dressed poorly, then it’s unlikely a bank manager will be endeared towards you. Make sure you present yourself in the best possible light; the bank manager must make a decision whether to invest a significant sum of money in you. If you take everything seriously, then they will take it seriously as well.
Making the best case you can
If your loan application is rejected, learn from the experience and go back better prepared. Don’t be afraid to commit significant time to preparing your application. If necessary, use a professional accountant to provide the most important figures, and present them in the best possible light. If you’re struggling, please view our guide to how to apply for a business bank loan to get you back on track quickly.