Struggling to understand why your business loan was rejected? Read on for several possible explanations and how to overcome them.
It’s not uncommon for businesses, both small and large, to require additional working capital to achieve their goals. Whether those goals are expanding a current business, purchasing new equipment, or simply meeting day-to-day needs, a loan is an incredibly helpful source of funding.
That’s why one of the worst things for a business owner is to hear that their business loan has been rejected. It’s frustrating, crushing, and discouraging. Fortunately, it’s not the end of the world.
A rejected business loan doesn’t mean you won’t be able to get the funding your business needs. Understanding why your business loan was rejected will help you determine the next steps to help your business succeed. Here are seven reasons for business loan rejection.
1. Your Credit Score Is Too Low
A low credit score is one of the most common reasons why a business loan gets rejected.
Your credit score plays a significant role in determining your eligibility for a loan. Even if your business has been around for a while, a personal credit score that’s lower than the lender’s required minimum will lead to a loan application rejection.
Of course, your business credit score is also heavily considered. Many small business owners don’t know that their businesses have their own credit scores. However, poor business credit, even with decent personal credit, will get your loan denied.
2. Your Credit Utilization Is Too High
Credit utilization is how much debt you have divided by your total available credit. Typically, lenders want to see credit utilization below 30%. If you’re using the majority of your available credit, you’ll be considered a higher risk, and lenders will believe that you won’t be able to pay back your loan and your business loan is more likely to be rejected.
However, too little credit utilization can hurt you too. Sometimes the reason for a business loan being rejected is that you’re actually not using enough of your available credit. While carrying balances is often considered a negative, having another loan or using your business credit card or line of credit can help you. Using your current credit and making payments strengthens your credit history and shows potential lenders that you’re responsible with your debts.
3. You Have Insufficient Cash Flow
The lender wants to make sure that you’ll be able to pay back a business loan. One way they verify this is by looking at your cash flow to see if you have enough money to cover your business expenses, make your payments, and still have money left over.
Poor cash flow is one of the most common reasons why businesses fail; insufficient cash flow raises serious red flags that ultimately lead to a business loan being rejected.
4. You Don’t Have Sufficient Collateral
Most lenders require some form of collateral to secure a business loan before they’ll provide funding. Collateral provides a promise of reimbursement. Should you fail to make payments, the lender can then seize your property.
Before a final decision is made, the lender assesses the value of the assets you name as collateral. If you provide the wrong type or don’t have enough, your business loan application is more likely to be rejected. You can apply for an unsecured loan, but these loans often require a personal guarantee.
5. You’re in the Early Stages of Business
If you’re trying to start your business or you’ve only been in business for a few months, there’s a good chance that your business loan application will be rejected. As mentioned before, lenders want to see that you have good business credit as well as good personal credit. They want to see decent cash flow, a solid track record of repaying debts, and reliable business experience.
A fledgling business has little history and likely won’t have sufficient credit. The lender, therefore, can’t verify that you will be able to repay your loan. As such, you’ll be considered too risky and the lender won’t approve your loan.
6. You Didn’t Submit All Necessary Paperwork
Another one of the most common reasons why business loan applications are rejected is that the applicants failed to provide all of the necessary paperwork. The actual loan application is just one part of the process. Lenders require several other types of supporting documentation, such as:
- Three to five years of business and personal tax returns
- Statements from your business bank account
- Financial statements
- Financial projections
- Legal documents such as your business license, permits, contracts, and lease information
- Your business plan
7. Your Business Plan is Lacking
Speaking of business plans, yours needs to be solid before a lender will consider your loan application. Your business plan should demonstrate that you’ve done your homework. It should include information such as:
- A clear mission statement
- A description of your products and services
- A market analysis
- An analysis of your competition
- Pertinent information about key players in your business
- Your financial plans
- Projected income statements for the next three to five years
Your business plan outlines your business goals and how you plan to achieve them. This information is crucial for lenders, who want to see what you’re going to do with the money they provide and how it will help further your business. You are likely to have your business loan rejected for funding if you do not provide sufficient information with your business plan.
Looking for an Alternative to a Traditional Business Loan?
Getting rejected for a business loan can be devastating. But it doesn’t mean your business is doomed.
If you’re having trouble getting a loan for your business, a sale-leaseback can help. Through a sale-leaseback, you can sell your home, converting your equity to the cash you need to help your business succeed without actually having to vacate the house. You remain in your home as a renter until you’re ready to move or repurchase the home.
There are several reasons why a business loan gets rejected. If you’re struggling to qualify for a business loan, talk to a financial expert about what could have caused your rejection, how you can fix the problem, and what alternatives are available to you.