Borrowing money as a small business entrepreneur is not plain sailing. A survey has suggested that not just start-ups but a majority of small businesses struggle to raise money and are looking to expand. When it comes to taking out start-up business loans, the scenario is no longer the same as it used to be a decade ago.
This had been a scenario for more than a decade. Still, lenders came forward that continued to lend money despite the recession, and not many people, according to a survey, reported that borrowing was unaffordable.
Banks are reluctant to fund your business whether you need money to get it off the ground or you are looking to expand your already established business. Start-ups may hinge on payday loans in Ireland if they just need a small amount of money to fill the gap.
This is convenient as you do not have to submit a business plan and get embroiled in other formalities are a must when you need a lot of money.
The lending industry has changed a lot ever since. Having faced economic recessions and the recent impact of the pandemic, lenders are pulling up the drawbridge. Now financing your business is no longer a cinch.
Why are Lenders being reluctant to approve Start-Up Business Loans?
This blog discusses the reasons why lenders are being hesitant to funding your business.
1. Poor Credit History
This is the biggest roadblock to why you are refused. Whether you are planning to start a new business or already running a business, you must have a good credit score. This is the first thing that a lender will look at to decide if it is worth lending you money.
Although some of the lenders have the scope for lending money despite a bad credit rating, they may still reserve the right to refuse you. There is no guarantee that they will lend money as it depends on the risk involved.
Some lenders may lend money despite a less-than-perfect credit rating, but it must be within a range of a fair credit score. In other words, you will likely get approval but with high-interest rates, and if you want to get a loan at a lower interest rate, your credit score should be perfect.
- Before you take out a loan to fund your business, check your credit report to know the current score.
- Boost it by paying your bills on time, such as energy bills, rent, credit card debt, and the like.
- A credit builder loan can be a great way to give a boost to your score by making instalments on time.
2. Inconsistent Cash Flow
If you are looking to expand your business, the first thing that a lender would like to look at is your cash flow. Inconsistent cash flow can call your repaying capacity into question. Lenders may doubt that you will likely struggle to continue your business operations and pay back the debt.
It also hints at the sales you make every year and overheads. They may conclude that you are lacking in attracting customers to your business that actually have an interest in your product or service.
A rule of thumb says that you should be able to maintain a stable cash flow, which means your profits should always be higher than the set limit or may vary within a higher range but not be less than that. It proves that your business is doing a fantastic job, and you will highly likely get money for the expansion of your business.
You cannot ignore the fact of inconsistent cash flow, just as the fact of a poor credit score. Ask your marketing team to put their finger on it.
- Do marketing campaigns attract clients?
- Are people engaged with the content you provide?
- Have you noticed a sharp decline in your sales?
- What measures did you take to improve so? What results did you get?
Try to find out the root cause and fix it.
3. Insufficient Experience
This is another reason why lenders may straightaway turn you down. If you have a start-up business loans, you need to ensure that you are not just new to your business. For instance, some people seek funding for the initial capital.
That is quite tough because you have not spent some time in your business. A lender would like to know that you have some experience in your field and should have spent at least one year raising funds from direct lenders. When you submit a business plan, it shows how you are going to keep the ball rolling.
Spend some time in your business. The ideal time to apply for small business loans in Ireland is when you have already spent two years. This shows that you have the skills to run your business.
When you show a business plan, your lender will likely be convinced about your future planning as they could see the strategies you initially framed and how you used to manage to run your business for two years.
Your lender will not seek a detailed business plan but some important highlights that ensure your cash flow will be stable in the coming years to enable you to pay back the debt on time.
4. Debt-to-income Ratio
This is another important aspect that a lender would like to take into account to determine your repaying capacity. If it is high, you should try to make it lower. A ground rule of thumb says it must not be 30% at the time of taking out a loan. Since you are borrowing money to fund your business and it can be quite expensive, a couple of lenders would want it to be not more than 25%.
However, if you want to improve your chances of approval, you should not have an outstanding debt at that time. Lenders will be more confident about your repaying capacity when you have no other debt obligations.
- To decrease the debt-to-income ratio, you should pay off all your debts.
- If you have already taken too much debt, try to make a minimum payment toward each of them.
- Do not close unused credit cards that have a balance because otherwise, this will increase your debt-to-income ratio.
To Wrap Up
Taking out start-up business loans is not duck soup. You will need to do a lot of research to understand how lenders look at a particular application. Lenders deny various reasons. Still, the most common reasons are lack of experience, high debt-to-income ratio, bad credit rating, and inconsistent cash flow.
It is vital you carefully check your application before taking out a personal loan. So, you do not get rejected because this does not just bring disappointment but pulls your credit points. Unfortunately, it makes it harder to qualify for a loan down the line.
In addition, you should choose a lender that provides these loans at affordable interest rates. Get an idea about the reputation of a lender from customer reviews on Google and social media sites. Ask about lenders’ interest rates by contacting them; it is a great idea if you get a pre-approval letter.
Hudson is a graduate of banking and finance and works as a financial consultant at MyLoansBoat. He has a professional qualification to counsel people about money management. At MyLoansBoat, his key duties include shortlisting applications of borrowers and counseling them about credit score improvement, building an emergency cushion, retirement funds, and getting rid of debt. He is an ardent reader of finance books and uses the gained knowledge to help people with their finances. He also writes for the company’s blog on various topics like budgeting, investing, saving, debt management, joint finances, and the like. His aim is to dedicate his life to helping people have a debt-free life.