6 Reasons Why Traditional Banks Refuse to Finance a Small Business

Even though the economic landscape has shifted in a positive direction for small businesses in the last few years, the Small Business American Dream Gap Report revealed that nearly three out of ten small businesses say it has become increasingly difficult to reduce their operating costs. Others find it hard to plan for unforeseen expenses. 20 percent of the small businesses surveyed shared they’ve considered closing their doors because of cash flow issues or an overall lack of growth. To get their business off the ground or to pull it out of a dangerous cash-flow situation, many startups, small and mid-sized businesses turn to a bank or another traditional lending source for a solution.

According to Entrepreneur Magazine, these types of struggles led, “53 percent of those small businesses to apply for funding or credit lines over the past five years -- and more than one in four said they had sought loans multiple times.”

The same study also revealed that, despite their efforts to apply for funding, 45 percent of these small businesses were rejected – more than once. Even more frustrating, 23 percent shared they were clueless as to why they’d been denied. Failure to access these needed funds forces small businesses to pause all plans for expansion, avoid hiring, struggle to cover expenses and – worse case – consider shutting down.

If your startup or small business has also struggled to access the funds it needs for growth and expansion, consider the following list of possible reasons why banks are refusing to work with you.

Credit Issues

Your credit situation reveals a lot to lenders about your character and past diligence. If you're plagued by a bad credit score, it can show a lack of responsibility in paying back your debts. Even if your bad credit score is the result of events outside your control – divorce, illness or other extenuating circumstances – a poor credit score will affect whether you receive funding. While it’s true that each lender will have a different credit score threshold they refuse to go below, they all agree that your score is a measure of your willingness and commitment to meet your financial obligations. Even alternative lenders willing to work with an entrepreneur with a less than stellar score (some will work with scores as low as 500) do so on a case-by-case basis.

Insufficient Operating History and Collateral


A big problem small business owners run into is securing the financing they need during the early days of their business venture. They quickly realize that securing a business loan requires time in business and collateral – two things a startup doesn’t have. Different from services we provide like spot factoring, a traditional loan requires that a business have two full years of tax returns; this proves to the lender the business has consistent gross and net profits. Lenders also require collateral (e.g. equipment or real estate) to leverage the risk of default on the loan. For a larger company, collateral is typically not an issue. For the small business or startup that has yet to attain such assets or have sufficient time in business, these reasons are likely why funding is out of reach.

Weak Management Team

It’s difficult to paint a clear picture of a company by simply examining its financial statements. Most lenders and investors recognize the key role a strong management team plays in a successful business venture. While employees obviously play a crucial part, the job of making strategic decisions ultimately falls to management. If a bank feels you do not have strong, capable management team, this will lead to concerns about your organizational integrity – and therefore – your business’ long-term growth and success.

Poor Cash Flow

From the bank’s perspective, the higher your operating cash margin is, the more likely your business will be able to overcome difficult periods and enjoy long-term growth. Without sufficient cash flow, a business will be unable to cover payroll, inventory and other operating expenses, not to mention a monthly loan payment. Even a profitable startup and small business can struggle to keep enough cash in their bank account. Poor cash flow management is a big reason why banks reject business’ loan applications.

Industry Risks

An industry’s risk is rated by the government Standard Industrial Classification (SIC) codes. This four-digit code was established in the United States in 1937 for the purpose of collecting and analyzing data. Each startup and small business should be aware of their SIC code. If your business is operating in an industry considered to be declining, weak or risky, this will considerably hinder your chances of securing financing from a traditional bank.

Debt-to-Income Ratio

Your debt-to-income ratio is important to banks because it sheds some light on how much additional debt you can handle, and how much of a credit risk you are; this ratio is calculated by dividing your monthly income by your total monthly debt payments. Your debt-to-income ratio will have a significant impact on whether you are able to secure a loan. Banks typically shy away from the business that already has existing debt with other lenders. It isn’t uncommon for a small or mid-sized business to seek financing from several different sources like a factoring company or bank, especially during the business’ startup phase. Down the road, this can work against the business owner when applying for a loan from a traditional bank.

Where Do You Go from Here?

Even startups and small businesses that have their establishment in order and present a banker with organized financials can discover their loan application has been denied. When this occurs, many businesses turn to personal or business credit cards, crowdfunding, friends and family, merchant cash advances or other alternative financing options. While some of these options promise quick cash, the high interest rates and long-term costs can quickly put a company out of business. Once the cash has been used, the business will find itself right back where it started – with an added burden of debt. The danger is pushing your business into an uncontrollable, downward spiral of debt.

Invoice factoring, on the other hand, allows a business to secure the working capital it needs while steering clear of high fees and risks. Invoice factoring (also known as receivables financing, and invoice financing) involves a business leveraging its unpaid invoices to generate cash on hand. The advantage of invoice factoring is that your business is given the cash it has already earned; thus, your business maintains the flexibility it needs, without the added burden of debt and risks. Ultimately, invoice factoring offers businesses an ideal long-term solution.

Security Business Capital has years of experience helping companies secure the funds they need to thrive and grow. Security Business Capital can use your unpaid accounts receivable to generate the cash you need quickly and easily - in as little as 24 hours. Our invoice factoring services will allow your business to secure the materials and equipment it needs, pay employees on time and take advantage of opportunities for growth – all while staying ahead of the competition. Temp staffing, oil and gas, transportation, manufacturing and distribution, business services and government are just a few of the industries in which Security Business Capital provides services.

To learn more about Security Business Capital’s invoice factoring option or our other service options, contact Security Business Capital for a free quote and/or consultation.