Top 10 Reasons for Business Funding Rejections

Running a business requires a lot of passion and patience and only an entrepreneur's mind can understand it. One of the most important things to run a business is funding. It's very difficult these days to grow a business with money drawn from your own capital only. Whether it's buying inventory, providing credit to customers, marketing, paying salary, or any type of expansion, it requires extra funding of working capital and other finance.

The pandemic events like COVID makes it even more challenging for business owners to secure funding. A business that does not get funding put everything on lenders that they do not support them when required. But at the same time Lenders (including Banks & Financials Institutions etc.) also have to safeguard their shareholders and depositor’s money. There are a variety of reasons why lenders are declining funding requests. I've broken down the top 10 reasons.

1.     Unclear Business Model

A clear business-model is a vital factor, a lender always looks for a business with an efficient and effective business model with immense clarity of action and trade. A clearly defined business model is crucial for a business to get funding.

2.     Poor Credit Rating

There is an increasing number of banks and financial institutions that have started referring to credit scores via different reports like AECB etc to evaluate credit score standards. But many businesses have been still ignoring or not aware of it. Maintaining a good credit score makes your business more desirable among the already existing.

3.     High Leverage

Lenders will always have more concerns about the business which already has a high existing debt with other lenders. It’s crucial for a business to have the right structure of funding for optimum utilization to keep a balance between its own equity and external debt. When a company is referred to as ‘highly leveraged’ has more debt than equity.

 4.     Poor Financials & Cash Flow

The business identified with a minimum volume of the cash flow will be preferred by lenders, a business that can't show this in their historical and projected financials are denied funding more often. Hence poor financial and cash flow is a major key in the rejection of funds.

5.     Lack of Proper Records.

Lack of proper accounts and not providing the records or information by the Accounts Department in a timely manner is the reason many lenders decline funding. The Business Owners do not give its due importance to this department considering it as a cost center. A noticeable variant is that in several entrepreneurial ventures, the accounts & finance department has saved a lot of money, and like we say money saved is money earned.

 6.     Limited Customers & Suppliers

Lenders often consider businesses with a high risk that has a significant bulk dealing with only a selected number of customers or vendors. They like to see diversity in a business so that continuing business is not impacted because of that particular customer or vendor disagreement. Hence the customer and vendor concentrations play an important role in accumulating funds for a business.

7.     Lack of historical performance

Lack of historical performance influences the preferential treatment to businesses by lenders which can show the track records to compare a business that is at an idea stage or newly established venture. The same applies to a long-standing established business as well where they lack experience in executing a new project they acquire. A business that has sustained for a certain amount of time and has reaped success and credibility in their performance is always desirable for lenders.

But the fact that your business is new or you received a new one-off order does not mean that it cannot obtain finance. There are lenders out there who are more than willing to work alongside new businesses or one-off transaction finance by offering structured finance. For example, some of the lenders provide funding based on the credibility of the paymaster even though the business is new.

 8.     High-Risk Industry

Lenders usually have their own list of negative sectors where they avoid any further funding exposure. Those businesses try to get funding from those specific lenders, will have a failure to secure funding. 

9.     Lack of Leadership & Management team

Lenders are reluctant to fund if business owners or their management team isn't experienced and lacks leadership skills concerns about the long-term success of a business. The task to catalyze the right team to the business - is a challenging one but is unavoidable.

10. Not Approaching a Right Lender

Approaching the right lender is the key to the doorway of funding, not all the lenders are funding all the business sector and product requirements. Each lender has its own focus area. Different lenders will have focus areas like project finance, invoice finance, bank risk finance, trade finance, etc.

I will cover topics like Alternative Source of Funding in the next Articles. Please provide your feedback and topic on which you would like me to cover next.

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