Getting a loan from the bank is not a simple process and can become frustrating, especially for entrepreneurs who are in the beginning or have no experience in dealing with banks.
In this context, a recent survey showed that 45% of entrepreneurs who were denied funding requests within one year are not at the first refusal, and 23% do not even know the reasons why their application was rejected .
In order to clarify things a little, and especially to be more prepared in the discussions with the bank, here are some common reasons why the loan application can be rejected:
The Bank wants to ensure, from the time of approval, that the business generates enough cash to pay the monthly debt, apart from salaries, budget obligations, supplier payments, rent, etc. If the available cash flow generated by the activity is not enough to cover at least 1.2 times the monthly payments to the bank, then crediting will not be approved due to lack of reimbursement capacity.
2. Insufficient guarantees
In addition to demonstrating the source of repayment of the loan (cash flow available), banks also require assets / properties to liquidate if a loan is not repaid. If the business does not have enough assets to be put into collateral, you can use personal guarantees. But attention! Providing guarantees is a necessary but not sufficient condition for the loan. Guarantees are considered a “second way out” = a backup option for the situation where the loan can not be repaid, but does not take the place of a refund source = cash flow available from the activity.
3. The business is in the start-up phase
The reality is that, most of the time, banks want to see a history, healthy and consistent turnover, a certain market experience. That does not mean that it is impossible to get funding in the launch phase. But less from the banks. For this, there are alternative funding sources such as European funds, business angels, crowdfunding platforms.
4. The business is over-indebted
If the company uses multiple credit facilities from several banks, apparently with the same funding object (for example, for the current activity), has a reimbursement capability at the limit, then the bank will probably hesitate to grant a additional credit.
To avoid this, make sure that you do not use your credit lines to the fullest, that you are fully refunding the obligations to the financiers in a timely manner, that you comply with the reimbursement charts. Also, to lower the leverage, you can negotiate lower costs with banks, longer repayment terms (for term loans), refinancing facilities in a single credit with a more relaxed repayment schedule.
5. Your business plan is not solid enough
Without a solid business plan, the banks probably will not consider the loan application. When presenting to the bank to request a credit, make sure you have an updated and detailed business plan to prove that you know the market, you know the competition, set clear goals in the medium and long term and a strategy implementation, you have realistically estimated revenue and expenditure, you have forecast the cash flow.