Finance
February 2, 2024
All entrepreneurs have one thing in common – they need funding to keep their dreams alive. The lucky ones have the resources to make it happen without a second thought and another fortunate few can get investments from friends and family.
For many people looking to start and run small businesses, however, the loan application is a fact of life.
The Small Business Loan – Rejection Rate, Loan Amount, and Other Statistics
The US Small Business Administration (SBA) reports that business owners borrow approximately $600 billion every year. Individual loans, however, are modest in size and small business loan rejection is quite common.
What Is Considered a Small Business Loan?
There is no specified amount for a small business loan, but the average value was last measured at around $663,000 by the Federal Reserve. That said, more than half of all applications evaluated were for no more than $100,000.
What’s the Small Business Loan Rejection Rate?
Big banks, which have assets totaling $10 billion or more, recently showed a 15 percent increase in small business loan approvals. Unfortunately, despite the fact that this increase brings them to a level not seen since before the recent recession, big banks still reject almost 80 percent of small business loan applications.
Small banks tend to have a higher approval rate at more than 50 percent, but these lenders depend more on guarantees from the SBA. This makes the application process longer, which means that it can take you more than three months to receive funding if your loan is approved at all.
If you’re one of the unlucky ones, you’re left wondering why your loan didn’t get approved. Here are just a few of the most common culprits.
5 Reasons Why Your Commercial Loan Application Got Denied
1. Your Credit Score Is Too Low
When you’re applying for a small business loan as an entrepreneur, your personal credit history is important. If you’re applying specifically for a business loan, you’ll want to have a personal score of at least 800.
If your business is established, make sure you know your small business credit score. Known formally as the SBSS℠, or Small Business Scoring Service℠, this number is calculated using the business’s credit history and your personal credit history.
The SBSS℠ is becoming more popular in approving or rejecting small business loans of $1 million or less. Businesses need a score of 140 or higher to pass pre-screen, but most lenders require a score of at least 160 for approval.
If you find out that your personal or business credit score is the reason for your small business loan rejection, your priority should be to start bringing that score back up.
2. Your Cash Flow Is in the Red
A business that is having cash flow trouble might face small business loan rejection. In fact, researchers from Pepperdine University found that of all the reasons why a business loan borrower was rejected, poor quality of earnings topped the list.
Lenders want to see reliable and stable patterns of income related to a company’s primary business line. Your regular revenue needs to be strong; it doesn’t count if you’ve managed to cut expenses or sold off assets.
3. You Lack Collateral
This ranks just below cash flow problems as the second most common reason for a bank to reject a small business loan application. Pepperdine’s researchers found that all banks surveyed required collateral for loans valued at $1 million, but just 63 percent required it for $100 million loans. The less liquid capital a business has, the more important it is for the bank to be able to reclaim its investment in other ways.
4. Your Business Already Has Too Much Debt
If you’ve taken out loans for your business in the past but haven’t built up the revenue stream to make regular payments, a lender will probably be hesitant to approve your application.
5. Your Business Plan Is Weak
To get funding for a new company, you have to do your due diligence in planning it out. This includes:
- Researching your target market
- Setting specific revenue goals
- Projecting early sales and profit margins
If you haven’t shown a lender that you have a plan for getting your company into the black quickly, you may have a hard time convincing anyone that you’re good for the loan.
Business Loan Denied? Here Are Your Options for Moving Forward
Venture Capital
If you’re looking to fund a startup, you might qualify for money from a venture capital firm. These organizations pool funding from investment groups, high net worth individuals, and other entities and use it to launch new companies. Venture capital isn’t a loan, which means that you don’t have to repay it, but you usually have to give the firm a share of your company.
Crowdfunding
With this increasingly popular model, you collect small sums from a large number of people to get the capital you need. Some, like Kickstarter, require you to meet a specific goal before they will distribute your funds. Others, including GoFundMe and Indiegogo, send you the money you receive regardless of whether you meet your goal.
If you choose an incentive model, you can offer specific tangible rewards or equity in your company. Some of these platforms require a monthly fee while others collect a percentage of funds raised.
Convert Your Home Equity
If you’re a homeowner and have paid off at least a portion of your mortgage principal, you’re already sitting on money that you can use to start your small business. People often don’t consider this option because they think it requires either taking out a second mortgage or moving.
Those used to be your only options for getting your equity, but not anymore. A sale-leaseback lets you sell your home, collect your equity, and stay in place as a tenant.
Your leaseback contract allows you to live there until you are ready to either buy it back or relocate.
Get the Funding Without the Stress
Starting a new business requires a lot of mental and emotional energy. Applying for a small business loan uses up a lot of both, and figuring out how to keep going after having a loan denied requires even more. A sale-leaseback lets you use funding that you already have – the equity you have built up in your home – so that you can focus on growing your business instead of paying back a loan.
Key Takeaways
If your small business loan rejection has got you down, you are certainly not alone. There are plenty of other financial solutions available to you. Consult your financial advisor to learn more about your options and decide which could be a good fit for your business.
