Entrepreneurs looking for financing sometimes face many obstacles. Several reasons can explain a refusal of bank credit: here are the main reasons. This list is of course not exhaustive: each case is different! Moreover, the impact of the elements mentioned must be considered collectively and individually.
Lack of confidence in the entrepreneur
The entrepreneur is the bearer of the project, and is the basis of it. In order to grant credit, banks must believe in the entrepreneur’s ability to see his project through to the end. If they have doubts about the entrepreneur’s abilities or his or her reputation, they will not consider granting any credit. The entire profile of the entrepreneur is scrutinized. For example, the history of the entrepreneur can have an impact (positive or negative) on the confidence of the bank.
A lack of confidence of the bank towards the project
The entrepreneur can very well represent his project, and have put together a concrete file. However, this file must integrate strategic elements such as the presence of a real need on the targeted market, potential profitability, services and products validated in the market… If a bank does not understand the project or does not see it succeed, it will not grant its confidence, and thus no financing. The elements brought to the bank must be coherent, but also credible and argued to convince it of the project’s potential. The latter must offer real prospects.
Too much risk
A bank that lends funds to a company will only do so if the entrepreneur’s project is viable. When studying the project, the entrepreneur must assess the risks that his investment represents and present them to the bank. A project involving a new concept that has not yet been developed and validated by a market may not meet the bank’s expectations. The risks must therefore remain reasonable.
Insufficient repayment capacity
As with individuals seeking credit, an entrepreneur who is unable to repay his loan will not be able to obtain one. The project must demonstrate sufficient repayment capacity. For this, the bank prefers to base itself on the real figures and the regularity of the cash flow. Moreover, banks rarely grant repayment franchises (period during which the company does not have to repay the loan).
An unfinanceable object
Sometimes credit applications are rejected because the object to be financed is not on the bank’s financing scope. Indeed, banks usually intervene to finance needs linked to the operating cycle, tangible investment needs… Some aspects of the company cannot be financed by a bank, such as credit refinancing or human resources, for example. This means that it is necessary to choose carefully the objects which will be financed by equity, and those which will be financed by the bank.
An own contribution is not enough
Banks expect entrepreneurs to finance part of their project with their own money. As a general rule, this personal contribution must be 20% of the total amount. But this is a theoretical figure. The more the entrepreneur invests his money, the more the risks are limited for the bank. Moreover, this demonstrates the involvement of the entrepreneur in his project. This condition of refusal generally only concerns “starter” projects: in the development phase of the project, the company or the entrepreneur must take on part of the risk.
The presence of financial imbalances
The presence of financial imbalances in the profitability structure or the asset structure of the company can affect the financing of the project. The bank will take into account several indicators, such as gross margin, solvency, liquidity, working capital requirements and working capital, added value, etc. It is not uncommon for a company to lack the necessary collateral in the eyes of the banks. In some cases, the bank will ask for private, personal or real guarantees. Ideally, one should avoid giving too many guarantees to one bank.
A demand that lacks profitability
In recent years, banks seem to have taken steps to improve their efficiency, which can be seen in a greater desire for automation and standardization. For example, banks are better managing the time they give to each application, so that they can filter the applications they receive more quickly. The elements that will tend to weigh down the processing of the file or that will require additional actions from the banks will greatly influence the assessment of the file.
Factors related to the banks and their environment
Other elements can influence the bank’s decisions, such as the global economic context, as well as that of the banking sector. The regulatory context of the sector can also have an influence, such as more important requirements according to the level of financial solidity of the banking institutions. Banks should also be based on a strict application of the fundamental logic and risk policy in force. Finally, banks must also base their decisions on their own decision-making process.
To convince the bank, the entrepreneur must elaborate a solid, coherent and potentially profitable project while proposing solid guarantees to the banks.