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Why Are Business Loan Applications Denied?

by Debi Enders

A lender can deny a loan for a variety of reasons. The two most common ones are:

1. A lack of collateral. Lenders want assurance that borrowers will pay back the money. That’s why they typically ask loan applicants to pledge collateral that they must relinquish should they fail to repay the loan. As a rule of thumb, the closer the collateral comes to exceeding the loan’s value, the better the chances of approval.

Collateral can come in several different forms. Often, it can be a home or some other significant asset. Other possessions, such as business equipment or inventory, can also serve as collateral. But because it will need to be sold — often at pennies on the dollar — it will not have the same value to your lender as it has to your business.

Liquid assets are also welcome sources of collateral. These include investments, cash savings, certificates of deposit and brokerage accounts.

2. Insufficient cash flow.
Lenders want to be confident in a borrower’s ability to make monthly payments. For that assurance, they look to cash flow — the money that comes in and moves out of a business every month. In other words, lenders need to see that your income from the customers who purchase your products and services each month is greater than the expenses you are paying out to operate your business. They’ll anticipate that those “surplus” funds will be used toward monthly payments. Generally, a lender will expect to see $1.25 in cash flow for every $1 borrowed.

If your business can meet these two benchmarks, your chance of loan approval is much greater. Of course, every business is unique. Your bank should be able to look at your circumstances and give you the specific guidance you need to get to a “yes.” Don’t be afraid to ask!

Debi Enders (debi.enders@commercebank.com) is vice president, small business banking at Commerce Bank.

Submitted 3 years 270 days ago
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