Business Advice Business Loans

Top Reasons Your Business Loan was Rejected (And What You Can Do About Them)

Every entrepreneur struggles with finding the right capital. After all, an idea is nothing without the means to implement it. Funding is essential to starting and growing a small business, so it can be quite a blow when your loan application gets rejected.

But don’t worry, rejection isn’t the end. You can always ask your lender to reconsider or look for another financing company.

Common Reasons Business Loans are Rejected

Here are seven common reasons why business loans are rejected and strategies to recover from them.

1. Poor credit score

Did you know that poor credit scores are one of the most common reasons for loan rejection? Even if your company has been in business for a while, your credit score is still the ultimate basis of how reliable you are in paying back your borrowed amount.

What you can do: If you’ve been turned down because of poor credit, the easy but non-compromising fix is studying what contributes to a high business or individual credit score. From there, you can proactively start working toward a better credit number.

2. Weak cash flow

Financing companies want to know if your business has enough cash on hand to fulfill monthly loan payments and rent, wages, inventory, and other expenses. They want to guarantee that you have the adequate cash flow to meet your expenditures, pay down the debt, and leave some money as a safety net in the bank.

Even if you are profitable, many small companies struggle with liquidity. This may be due to advanced payments to suppliers before getting revenue for their goods or services.

What you can do: Inconsistent cash flows, narrow profit margins, or regular seasonal downturns can be a red flag to lenders. So, look for strategies to cut costs or increase sales before requesting a loan.

As a rule of thumb, you should assess your financial management abilities. Use accounting software to produce cash flow forecasts and estimates quickly. Afterward, track your cash flow every week to be on top of things. Don’t allow accounts receivable to go over 60 days past due. 

3. Insufficient collateral

Many conventional lenders demand you put up collateral—an asset you own and have pledged to a financing provider to act as their safety net. If you don’t pay for your debt, your lender will take ownership of your asset. Borrowers who don’t put up collateral are considered bigger risks than those who do.

What you can do: If this is the case, consider unsecured loans as an alternate means of finance. At JK Capital, you don’t need collateral to be considered for a loan, so you won’t lose your personal property even if you default. Even better? JK Capital can handle your application in only five working days.

4. Not enough time in business

If your company is still in its early stages, your credit and cash flow histories may be insufficient to secure a loan. It’s worth noting that merchants don’t always immediately record your transactions to the commercial credit bureaus. When you open an account with a different supplier or a new vendor, be sure that they register your payments so that your company can have a positive credit history.

What you can do: Even if you haven’t been operating in your industry for a significant period, you may have a thriving firm and strong finances. Thus, you simply need to find the perfect lender for your case. When determining where to seek small business loans, consider every possibility. Some lenders don’t require long business experience, so do your research and weigh your options carefully.

5. Too high or too low debt utilization

Creditors often prefer that you use less than 30% of the entire loan. Many lenders will flag your business as “overextended” if you use too much. It makes financers apprehensive that you won’t be able to repay them in time. But this doesn’t mean you should completely abstain from debt.

What you can do: If you haven’t made any loans or never had the chance to use your credit in the past, this might work against your enterprise. Maintain an acceptable debt consumption by keeping track of your entire credit limitations. It includes lines of credit, business credit cards, personal credit cards, and other sources of loans.

6. Poor business performance

Financing providers may be wary of approving debt to enterprises with low income and long break-even points. It undermines the ability of your organization to pay back the loan. 

What you can do: Controlling your credit and increasing your firm’s cash flow can be the solution to your application’s rejection. Ensure that you’ve submitted recent financial accounts so that inaccurate data don’t influence the financing decision.

You may also consider lowering the amount of your asking loan. While this may seem discouraging at first, it may be sufficient to satisfy your company’s demands without placing you under unnecessary financial strain when making loan repayments.

7. Too big or too small a loan

Lenders look at your debt-service ratio to see whether you have the adequate cash flow to pay back your loans. The higher the figure, the healthier your financial capacity is. For a small business loan application, you’ll often need a ratio of at least 1.15. But minimizing your debt to get a better percentage might be harmful. The expense of administering small loans may not be worth it for some lenders. 

What you can do: Check your financial estimates and company strategy. Doing so ensures that you’re not undermining how much money you require. Perhaps, you can also reapply and request a more significant amount.

If you don’t need that much, it’s unnecessary to pressure your business into applying for a lump sum or considerable capital. Instead, look for an alternate finance provider, such as a microlender or an invoice-based financing option that offers smaller loans.

Earn That Loan Approval Today

Research is everything when filing a business loan application. You have to make sure the lender you choose can accommodate your specific loan terms and that you meet their qualifications. Business owners having trouble with bank loans can consider online lending companies. Apply for a business loan from JK Capital for accessible and quick applications.

Business Loans Guides

7 Questions Lenders Ask During a Business Loan Application

If you’ve ever had to take out a personal loan, then you know that interviews are a critical part of the application process. Interviews are a way for financers to ensure that you can pay back the amount you borrowed in full and on time.

Business loans work the same way. You need to go through an interview process to support your eligibility for the loan. Your goal is to prove the following:

  • Your business can make loan payments on time.
  • Your business has a clean track record of cash flow.
  • You, as an owner, have other assets to pay the loan if your business fails.

This might seem like a lot to prepare for a loan interview. But much like a job interview, the lending company needs to know if you fit the requirements and qualifications. 

Common Business Loan Application Interview Questions 

To help you out, here are some of the common questions asked when applying for a loan that can help you prepare for your interview.

1. How would you summarize your business?

If ever you’re asked this question, you simply have to know your business plan. So, make sure that you know your business like the back of your hand.

Interviews are a chance for you to elaborate on certain aspects of the business plan. The added details can boost your chances of being approved. However, you don’t have time to discuss your entire business plan, so ensure that your answers are like an elevator pitch, highlighting your business’s profitability and cash flow.

2. How will you use the money?

The financier wants to know how you’ll use the money to build your business. Telling them all the things you’ll buy or spend on won’t be enough to answer this question. Instead, justify all your purchases and explain how these will aid the growth of your business.

Lenders want you to assure them that you can pay back the loan. So, for example, if you’re going to use the money to expand your physical store, you can inform the lender that the expansion will give you the money to repay the loan. 

3. How will you repay the loan?

Aside from knowing how you’ll use the money, the loan officer’s interview questions would include how you plan on repaying the loan. Of course, you’ll be using the money for your business, so it only makes sense to pay them back with the profit you’ve made, not your net income.

Financers won’t bother granting your application if your business doesn’t seem all that profitable. This is why aside from discussing the profitability of your business, you should also talk about the other assets you have that can repay your debt in case your business goes sideways.

Consequently, your lender may also ask about your past business, tax returns, or outstanding debt that can affect your repayment. It may be difficult for you to evenly distribute payment for your loan debt and keep the business afloat. As such, you need to prepare an answer if you’re still repaying old debts.

4. How do you manage your accounts receivable and payable?

How do you manage what you owe to others and what others owe your business? Answering this will give your financers an idea of your business’s cash flow and the kind of companies you deal with.

5. What kinds of insurance do you have?

Insurances help cover the costs associated with whatever damage your business sustained. Without business insurance, owners may have to pay out-of-pocket. Being insured helps assure the lender that you have a safety net to protect it from financial crises and other unforeseen problems.

6. How do you explain any of your past business failures? 

Lenders want to know if you’ve had any financial hardship or failed businesses in the past. Prepare to explain these that might set off alarm bells for your lending company. They’ll evaluate what went wrong—if it was the business structure or the management. This is insurance on their part because they wouldn’t want to provide a huge sum of money to a business that has a history of repeated, similar failures.

7. Can you put up any collateral?

Collateral is something you pledge as a safety net for the loan if you cannot pay for it. This can be assets such as a house or inventory. If you don’t pay your loan, your lending company takes the collateral.

Tips to Ace Business Loan Interview

  • Know your business plan inside out

To help answer any question thrown at you, no matter how hard, know your business plan inside-out. Backing up your claims with figures and examples will help.

  • Accurately estimate the amount of capital you need

Don’t ask for too little or too much. The capital you ask for should match what you’re planning to do with your business. It would help to have estimates or quotes for the materials you need and an expenditure forecast of other areas you’ll need to spend on to inform your lender better.

  • Do your research on the lender

If you’ve chosen a lender, learn about the types of businesses they prefer. This will give you a glimpse of whether or not you’ll fit their requirements or not.

  • Have relevant documents on hand

It’s always good to be prepared. Get physical copies of relevant records as proof during your interview. This will help strengthen your argument for why you should land this loan. You never know when you’ll need to show your facts and figures to drive your points home.

Get Approved Today

Getting a loan application is difficult, but not impossible. Boost your chances by preparing for the interview and knowing the common loan questions and answers. If you’re a business owner looking for loan options with a simple process, consider online lending companies like JK Capital. With easy and quick applications, you get a seamless experience and immediate funding.

Apply for a business loan today!

Small Business

Effects of the COVID-19 Pandemic on Philippine SMEs

Two years after the COVID-19 pandemic, a clear takeaway is that the Philippines was not, in any way, spared by the global crisis. COVID-19 crippled the Philippine economy. Thousands of businesses closed—with micro, small and medium enterprises (MSMEs) being hit the hardest.

It’s really an unfortunate scenario, considering that MSMEs have been significantly contributing to the Philippine economy in recent years by increasing employment opportunities for Filipinos, boosting trade activities across industries, and so on. That is until the pandemic happened.

As you’ll see in this infographic, there’s no shortage of statistical data showing how COVID-19 affected small businesses in the Philippines.

Effects of the COVID-19 Pandemic on Philippine MSMEs

Effects of the COVID-19 Pandemic on Philippine MSMEs

As we continue to live with the COVID-19 pandemic, it’s vital to take a step back to see where we have been in the past two years and where we’re headed. For socioeconomic think tanks and policymakers, the question is, how did the pandemic affect the Philippine economy?

The Importance of MSMEs to the Philippine Economy

One of the top players in the country’s economic growth is the MSME sector. Entrepreneurs in this category may be all too familiar to you—from the grocery store owner in your neighborhood to online sellers and tech start-ups.

MSMEs also refer to business organizations with no more than 200 employees and whose asset size does not exceed P100 million. They encompass a wide range of industries, including wholesale and retail trade, repair of motor vehicles and motorcycles, accommodation and food services, manufacturing, service-oriented activities, and finances and insurance.

MSMEs have valuable contributions to business economics, as data and statistics reveal. 

  • The Philippines is home to 957,620 businesses. Of these, 952,969 (99.51%) are MSMEs—making them the main drivers of the local economy—compared with large enterprises, which only total 4,651 (0.49%).
  • MSMEs have established businesses in key locations around the country, including the National Capital Region (201,123), Region 4A – CALABARZON (139,363), Region 3 – Central Luzon (111,262), Region 7 – Central Visayas (65,682), and Region 6 – Western Visayas (57,469).
  • Thanks to MSMEs, there are approximately 5.4 million jobs available for Filipinos. This figure represents 62.66% of the country’s total employment rate.
  • MSMEs are also active in export trade. With approximately 60% of the country’s exporters belonging to the sector, 25% of the country’s total exports revenue comes from MSMEs.
  • There are about 14,000 micro, small, and medium retail stores in big shopping centers.

Impact of COVID-19 on Philippine MSMEs

Given their limited size and resources, it wasn’t surprising that MSMEs would face numerous challenges in their business operations during the pandemic. Factors like transport restrictions, stay-at-home orders, transition to remote work setups, and the like made it difficult for MSMEs to conduct business as usual.

From paying staff wages, social security benefits, and loans to collecting payments from customers, MSMEs found themselves in serious financial distress. As such, they could not maintain a good cash flow in their day-to-day business activities.

  • The Asian Development Bank released a paper in September 2020, reporting that 70.6% of MSMEs had to temporarily pause operations as a result of large-scale lockdowns in the Philippines.
  • COVID-19 quarantine measures also forced 19.1% of MSMEs to cancel their business contracts. Meanwhile, 35% of those who managed to continue operations faced issues like delays in product or service delivery to customers that would only worsen their financial health.
  • Between 36.7% and 42.1% of MSMEs either had no savings or were on the verge of running out of cash at the onset of the pandemic. Micro and small firms had to borrow money from people they knew—family, relatives, or friends—while medium-sized firms dipped into their own funds or used their profits to stay afloat.
  • Big businesses have liquid assets, making them more likely to survive a pandemic for over six (6) months than MSMEs.
  • Perhaps the worst effect of the COVID-19 pandemic is causing 12.7% of MSMEs to permanently shut down after being bankrupt.

Business Funding During the Community Quarantine

MSMEs who needed financial support to cope with COVID-19’s impact on their business explored different funding options. This strategy has allowed them to carry out their business recovery plans slowly.  

  • The Department of Trade and Industry (DTI) has a zero-interest, zero-collateral loan called COVID-19 Assistance to Restart Enterprises (CARES) program. As of December 2021, about 137,168 business owners were able to borrow a total of P6.13 billion from the program.
  • While 53.8% of enterprises used their own funds and profit to maintain business operations, the scenario was different for microenterprises—66.2% had to request financial assistance from family or relatives, and 61.3% approached informal lenders. Business partners also helped 10.3% of companies with their funding needs.
  • Bank loans and lines of credit became alternative sources for 9.9% to 15.3% of businesses, providing them with the working capital they needed. In cases where small and medium enterprises had already exceeded their credit limit, they could make arrangements with the lender to receive additional funding through business overdrafts.
  • Non-traditional financial institutions have greatly helped MSMEs, too. At the height of the pandemic, microfinance institutions and pawnshops allowed some 6.1% of enterprises to take out small business loans to support their attempts to bounce back from the crisis.
  • Digital finance platforms such as peer-to-peer lending or crowdfunding were also instrumental in offering business financing for 1.7% of companies.

Philippine MSMEs: On the Road to Recovery

COVID-19 has taught us valuable life lessons, including managing finances amid a crisis—in the context of the Philippine economy, that means getting MSMEs involved in reviving the country’s favorable business conditions.

Thus, restarting the economy requires the recovery of our micro, small, and medium enterprises. Now that the pandemic is slowing down, it’s the perfect time for MSMEs to reopen their doors and begin their journey toward business recovery. 

Fortunately, small business loans are accessible now more than ever. JK Capital offers zero-collateral, low-interest business loans to boost your finances and help your company get back on track. Inquire about our easy business loan!