Why Don’t Banks Lend to Small Business Owners? And How You Can Change That
If you’ve ever been denied a loan by your bank, you’re not alone. Many small business owners find themselves stuck in a frustrating cycle where, despite running a profitable business, they’re deemed “bank non-lendable.” But don’t lose hope—there are steps you can take to turn things around.
Why Banks Say No
Banks rely heavily on numbers to make lending decisions, and for many small businesses, those numbers don’t tell the full story. Here are the most common reasons why banks deny loans to small business owners:
1. Losses on Tax Returns
Many business owners use aggressive tax strategies to minimize taxable income. While this reduces your tax bill, it can make your business appear unprofitable on paper, signaling higher risk to lenders.
2. Limited Credit History
A lack of an established business credit profile makes it harder for banks to assess your reliability. Without a proven track record, lenders may see your business as too risky to invest in.
3. Inconsistent Cash Flow
Seasonal or irregular revenue streams can raise concerns about your ability to meet loan payments consistently. Banks look for steady, predictable cash flow that ensures repayment, even during slower months.
4. High Risk Perception
Small businesses often lack sufficient collateral or a long track record of success. This makes banks hesitant to extend credit, especially when they see small businesses as inherently more vulnerable to market fluctuations.
5. Not Enough Time in Business
At minimum, banks and bank-SBA lenders require that a business present at least two filed business tax returns or 1040 personal tax returns with a Schedule C. However, Everstream Capital’s bank lending partners usually ask for at least three filed returns.
Each of these tax returns must demonstrate sufficient taxable profitability to calculate an acceptable Debt Service Coverage Ratio (DSCR). The industry standard for banks and bank-SBA lenders is a minimum 1.25 DSCR, which means your business must generate $1.25 in net operating income for every $1 of debt repayment.
As Chase Bank explains:
“Banks often prefer a DSCR of at least 1.25, indicating that a business has sufficient working capital plus a financial cushion to handle unexpected costs or downturns without missing a debt payment.”¹
5 Ways to Become Bank Lendable
1. Show a Profitable Tax Return
Banks evaluate your tax returns to gauge profitability and stability. Aim to report at least 15% taxable profit based on your gross revenue. For example, if your business generates $1,000,000 annually, your taxable profit should be around $150,000.
As Jared Hecht, co-founder of Fundera, explains:
“While profit isn’t important for obtaining a short-term loan… it’s time to start demonstrating more profits on your tax returns.”²
2. Build a Strong Business Credit Profile
Separate your personal and business finances to establish a business credit history. Open a business credit card, pay suppliers on time, and monitor your business credit report regularly.
3. Improve Cash Flow Visibility
Banks want to see steady, predictable cash flow. Create detailed financial reports, such as profit and loss statements and cash flow forecasts.
4. Pay Down Existing Debts
A high debt-to-income ratio can make lenders hesitant to approve your loan. Focus on reducing outstanding debts to improve your financial profile and show lenders you can manage additional credit responsibly.
5. Maintain Clean Financial Records
Clear and accurate financial records make the loan process smoother. Use professional bookkeepers to ensure P&Ls and bank statements are up to date.
As Axos Bank explains:
“Designating different accounts for these transactions can give you a clear picture of your financial status and simplify bookkeeping.”³
Final Thoughts
Being “bank non-lendable” doesn’t have to be a permanent situation. By taking these steps, you can improve your chances of securing financing. At Everstream Capital, LLC, we’ve helped countless business owners navigate these challenges and secure the financing they need to grow.
Footnotes
¹ Chase Bank (December 2022): “What Is the Debt Service Coverage Ratio?” Retrieved from chase.com
² Jared Hecht, Fundera (January 2020): “The 4 Things That Help Small Businesses Get More Funding.” Retrieved from forbes.com
³ Axos Bank (2023): “Why You Should Have Multiple Small Business Bank Accounts.” Retrieved from axosbank.com