A business requires capital for it to be sustainable i the long run, and money being a scarce resource, it’s is not always available and that is why financial institutions such as banks and credit offering saccos came up to assist in this. Different types of borrowers have different financial needs and these are met by the wide range of loans that are available to meet their needs.
The major key to success for any business the wide customer base since it is the customers that provide income to the business by buying from them thus generating sales, the small businesses lack this and hence most of them end up closing down when they are still in this stage. Due to the difficulty of accessing any other means to inject capital, these businesses result to borrowing, they use these kind of loans to for example buy additional manufacturing equipment and the like so as to increase the units of production and consequently the sales too.
Before a financial institution advances a loan to any business, it requires to proof check some several things about it so as to establish how possible it will be for the bust of repay back and most of these businesses fail at this point because of a credit report that is on doubt. Financial institutions are also in bushland their aim is not to make losses as a result they will want to demand some proof that your business is able to repay the loan and that is by giving some security for example a title deed and the like so that in case you default in paying then the bank will sell off that piece of land and repay themselves.
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Your business might fail to get approved for a loan because it is in a risky sector, financial institutions will try as much as possible to minimize the probability of you defaulting and as a consequence they will deny you the loan. Another common reason why most businesses loan applications do not go through is because they lack a clear purpose or a plan on how they want to spend the money from the loan, the financial institution will only finance a business that has clear plans that are likely to generate funds in future that will be used to finance the loan.
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Young growing businesses fail to get loan approvals because they paying ability is in doubt since they do not have enough sales and capital base to repay the loan.
There are some benefits of a business loan one of which being that the business is able to expand its scope of services and this will lead to increased sales. Business loans also attract a small interest rate and this is an advantage because the business will only repay a small extra amount of their profits.