Entrepreneurs looking for financing face many obstacles. There are several reasons why a bank may refuse credit, the most common of which will be discussed below. Of course, this list is not exhaustive: each case is unique! In addition, the impact of the elements cited must be considered both collectively and individually.
A lack of trust in the entrepreneur
Entrepreneurs are the promoters of their projects, and they are the foundation of it. To grant loans, banks must believe in the entrepreneur’s ability to carry out the project to the end. If they have doubts about the entrepreneur’s ability or reputation, they will not consider giving him any credit. The entire profile of the entrepreneur is scrutinized, and their history can have an impact (whether positive or negative) on the trust the bank places in them.
A lack of confidence in the project
Entrepreneurs must present their project convincingly and have put together concrete documentation pertaining to it. Crucially, this documentation must integrate strategic elements such as the presence of a real need in the target market, potential profitability, products and services must be validated in the market. If a bank does not understand the project or does not see it ever being a success, there will be no confidence in the project, and therefore no funding. The information presented to the bank must be coherent, credible, and well-argued to convince them of the potential of the project. It must offer real prospects.
Too great a risk
A bank will only lend funds to an entrepreneur if the project is viable. In analyzing the project, the entrepreneur must assess the risks of by his project and present them to the bank. A project relating to a new concept that has not yet been developed and validated by a market runs the risk of not meeting the bank’s expectations. The risks must therefore remain reasonable.
Insufficient repayment capacity
As it is for individuals who apply for a loan, an entrepreneur who is not able to repay his loan will not be able to obtain one. The project must demonstrate sufficient repayment capacity. For this, the bank prefers to rely on actual figures and the regularity of cash flow. In addition, banks rarely grant repayment moratoriums (period during which the company does not have to repay the loan).
An unfinanceable object
Sometimes credit applications are rejected due to the object to be financed not falling within the bank’s fundable scope. In fact, banks most often intervene to finance needs linked to the operating cycle, tangible investment needs, etc. Certain aspects of the company cannot be financed by a bank, such as refinancing of loans or human resources, for example. This therefore means that you must choose the objects that will be financed by internal funds, and those that will be financed by the bank.
Insufficient contribution by entrepreneur
Banks expect entrepreneurs to finance part of their project with their own resources. Generally, this personal contribution should be 20% of the total amount. But this is a theoretical fact. The more the entrepreneur invests their money, the more the risks are limited for the bank. In addition, it shows the involvement of the entrepreneur in his project. Refusal on this ground generally only concerns “starter” projects: during the development phase of the project, the company or entrepreneur must bear part of the risk and expense.
The presence of financial imbalances
The presence of financial imbalances in the profitability structure or the asset structure of a company can affect the financing of the project. The bank will several indicators into account, such as gross margin, solvency, liquidity, working capital requirements and working capital, added value, etc. It is common for a company to lack the necessary collateral in the eyes of banks. In some cases, the bank will ask for private, personal or real guarantees. Ideally, you should avoid giving too much collateral to a single bank.
A demand that lacks profitability
In recent years, banks seem to have taken steps to improve their efficiency, which has translated into a greater desire for automation and standardization. Thus, banks better manage the time they allocate to each request, to more quickly filter through the files that they receive. Aspects of a file which tend to hinder its processing, or which will require additional actions to be taken by the bank will greatly influence the assessment of the file.
Factors related to banks and their environment
Other elements can influence the decisions of the bank, such as the overall economic context, as well as that of the banking sector. The regulatory context of the sector can also have an influence, such as stricter requirements depending on the level of financial soundness of banks. Banks must also operate on a strict application of fundamental logic, with a risk policy in force. Finally, banks also act according to their own decision-making process.
To convince a bank that a project is a worthwhile investment, an entrepreneur must present a concrete, coherent and potentially profitable venture while also offering solid guarantees.
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Presentation : Geotrend presentation – YouTube
Articles in French by the same author : Erwan Coatnoan de Kerdu, Author at Startup Info