What To Do If Your Business Loan Is Denied
Getting denied for a business loan is disappointing. But understanding why your application was denied and taking steps to correct these issues can boost your odds for approval next time.
Table of Contents
- Why Your Business Loan Was Denied
- What To Do If Your Business Loan Was Denied
- The Bottom Line On Being Denied For A Business Loan
- FAQS About Business Loan Denials
Was your business loan denied? If so, don’t be discouraged. Instead, take action to get the funding your business needs.
In this post, we’ll look at the most common reasons business loans are denied. Next, we’ll provide tips on how to improve your loan application when you reapply.
Why Your Business Loan Was Denied
There are a number of reasons your business loan application was denied, from low credit or revenues to a simple error on your application. Here are common reasons that business loan applications are rejected.
Poor Personal Or Business Credit
Lenders alleviate risk by giving the best terms and highest borrowing limits to their most creditworthy borrowers. Borrowers with fair or poor credit will face challenges like higher interest rates, shorter repayment terms, and (depending on the loan type and lender policies) outright denials for small business loans.
In addition to your personal credit score, lenders will also look at your credit history. Negative items like foreclosures, bankruptcy, collections, and even numerous inquiries can hinder your ability to get a business loan.
Some lenders also look at your business credit score. This can be a particular challenge for businesses that haven’t yet established business credit, as well as businesses that have low business credit scores.
Lenders want to make sure that borrowers are able to repay a loan. If your business revenue is too low or you have inconsistent cash flow, your loan application may be denied.
High Amount Of Debt
Lenders want to feel confident that borrowers are able to repay their loans. Remember, it’s all about risk for the lender. If your business has a high amount of debt, you won’t qualify for a loan. If you do qualify, it will be with an alternative lender with higher rates, shorter terms, and lower borrowing limits
Lenders generally want to see a credit utilization of 30% or less. The higher your credit utilization, the more limited your options will be.
Business Is Too New
Lenders want to alleviate risk by seeing a proven track record of success, which is why most lenders require your business to be in operation for at least two years to qualify for a loan.
Startups and new businesses can qualify for business loans but options are more limited. Rates are often higher, repayment terms are shorter, and funding may only be available through alternative lenders. You may also be required to provide additional documentation during the lending process, including detailed business plans and future financial projections.
No Collateral Or Equity
To alleviate risk, many lenders require collateral to secure your loan. Collateral in the form of business or personal assets can be seized and sold if you default on the loan. If you don’t have sufficient collateral to secure your loan, your application may be rejected.
Some loans may also require a down payment. Putting in your own equity shows the lender that you’re serious about repaying your debt. If you’re unable to come up with the funds to make a down payment on your business loan, you may not qualify for that specific loan.
Some lenders prohibit specific high-risk businesses from receiving loans. These high-risk ventures are viewed as financially unstable through the eyes of the lender. Examples of high-risk businesses include:
- Gambling businesses
- Finance & investment businesses
- Vape & tobacco shops
- Multi-level sales & marketing
- Adult-oriented businesses
If your business is in a high-risk industry, your loan options may be limited, and you may be left with high-cost loans with terms that aren’t so favorable.
Sometimes a business loan is denied because the loan application wasn’t complete. This could be anything from a missing date or signature to a document that wasn’t submitted. In most cases, you can resubmit your application with all information intact, but some lenders require a waiting period before you can reapply.
What To Do If Your Business Loan Was Denied
If your business loan was denied, the first step is to find out why it was rejected. Once you know why your loan was rejected, you can take steps to improve your odds of approval next time. Here’s everything you need to know.
Find Out Why Your Business Loan Was Denied
Most lenders will provide written notification as to why your business loan was denied. If you don’t receive this notification, contact the lender directly to find out why your application was rejected. Once you know the reason your loan was denied, you can begin taking steps to correct the problem before reapplying.
Check Your Personal & Business Credit Score & History
Many lenders put a strong emphasis on personal credit score and history when determining whether to approve a loan. If your score falls below the minimum requirements, your application will be rejected.
Before applying for a business loan, make sure you know your credit score. There are plenty of sites that allow you to check your credit score for free, so take advantage of one of those. While credit requirements vary, most lenders want to see a credit score in the high 600s (or even higher) for business loans.
Make sure also to check your credit report to look for negative items that could impact your loan decision.
Some lenders also consider business credit, so check your business credit score, as well. If you haven’t yet established business credit, you may have to look at other loans and funding that can help build your credit before applying for other products.
Improve Your Credit Score
If you determine that your credit score is preventing you from getting approved for a loan, take the time to improve your credit. Don’t be deceived by companies that promise to boost your credit score for a fee, as you can take a few simple steps to raise your score on your own.
- Dispute Credit Report Errors: After reviewing your report, dispute any errors with the credit bureaus. This may include accounts you don’t recognize, late or missed payments that were made on time, and balances that are incorrect.
- Make Payments On Time: One of the keys to a healthy credit score is to make every payment on time as scheduled. Even just one late or missed payment can cause your credit score to decline. If you find yourself in a situation where you are unable to make your payment, reach out to your creditor immediately.
- Pay Down Debt: High credit utilization can impact your credit score. Paying down your debt (or, ideally, paying it off) can help raise your score.
- Stop Applying For New Accounts: If your loan application is declined, it may be tempting to apply with numerous lenders if you’re in need of capital. However, too many inquiries are a red flag for many business lenders. Make sure to do your research on lenders and limit yourself when applying to take on new debt.
Increase Your Cash Flow
Insufficient or inconsistent cash flow can impact your ability to receive a loan. If this has happened to you, there are a few things you can do to improve and increase cash flow:
- Introduce a new product or service
- Increase pricing
- Provide incentives to customers that pay early
- Send out invoices promptly and automate reminders
- Compare prices from suppliers
- Do away with obsolete products or products that don’t sell
- Evaluate and cut unnecessary expenses
Be Prepared For The Business Loan Application Process
Submitting an incomplete application is a quick way to get denied a business loan. To avoid this, make sure you’re prepared with the right information and documentation.
Generally, a business loan application requires information personal and business information including:
- Legal name, business name, & contact information
- Purpose of loan
- Loan amount
- Social Security Number
In addition to filling out the application, you’ll typically need to provide supporting documentation. This may include:
- Prior years’ tax returns (business & personal)
- Balance sheets
- P&L statements
- Resumes for all owners
- Debt schedules
- Collateral schedules
Certain lenders and types of loans may require additional documentation. For example, startup business owners without prior business tax returns may have to present a business plan, financial projections, and proof of industry experience to receive a loan. Additionally, you may be required to sign a personal guarantee (even if you’ve pledged collateral).
One final thing to note is that your lender may require additional information throughout the loan process. Make sure to respond to phone calls, emails, and other communications promptly to keep the process moving and to avoid having your application rejected.
Consider Alternative Lenders
Traditional lenders like banks or credit unions often have strict requirements for small business loans, making it difficult for newer businesses, applicants with credit challenges, or businesses in certain industries to obtain funding.
Businesses that need quick access to capital can look to alternative lenders for their funding needs. Online lenders have looser requirements and offer fast funding — some as quickly as the same day or the next business day. The downside is that these lenders also have lower borrowing amounts, shorter repayment timelines, and higher interest rates.
However, these drawbacks may be well worth it to businesses that don’t meet the stringent requirements of traditional lenders and don’t have time to wait for a loan.
There are multiple types of loans available. Here’s a breakdown of the type of funding available for small businesses:
If you’re unsure of where to start, kick off your search with our list of the best small business loans.
The Bottom Line On Being Denied For A Business Loan
Being denied for a business loan isn’t uncommon, but that doesn’t make it any less hard to swallow — especially if your business is in need of capital. However, by identifying why your loan was denied, taking steps to improve your application for next time, and even exploring alternative lenders, you’ll soon have access to the funding your business needs to succeed.