8 Reasons Your Business Loan is Declined
Having your loan application rejected is always frustrating for any business owners but unfortunately it is a common challenge you will enconter as a business owner. Reason being, lenders are very cautious in giving an application the green light as they have yet to determine if they can trust you with the funds.
The reason why a business loan applications get rejected would vary from one business to the next and lenders may not give you a clear explanation for the rejection. With that in mind, here are 8 common reasons your loan application gets renied and what you can do to improve your future chances.
1. Incomplete Application
One of the most obvious reasons. Missing a supporting document, making a mistake while filling out a mandatory field may result in rejection. To avoid such situation, gather all the necessary documents in advance and double check your application before submission.
Some lenders might require a collateral when you seek out a loan as security, especially if you are seeking out a secured loan, in the case you are unable to meet the obligations and defaulting. If the collateral lacks the appropriate value, lenders would be unwilling to approve.
3. Insufficient credit score
While self explanatory, your application can get rejected because your credit score does not meet the minimum for the type of loan you are applying. For example, an SBA loan have a high credit requirements but other loan types might have a lower minimum credit score.
4. Your business is still very young
If your business is still new, say less than a year old, you might lack the required track record to convince lenders. However, there are other financing type more suitable for new businesses that you can take advantage of such as a small business grant, line of credit or a business credit card.
5. Too many existing loans or advances
Having too many existing loans or advances will put lenders on alert. They are not confident you can meet the payment schedule because of the strain placed on your finances from needing to make a lot of payments.
6. Debt utilization ratio
Lenders have more confidence in businesses with lower debt utilization ratio as it indicates that your finances are not heavily strained to make the payment schedule. If you are reaching your current credit limit, the potential strain on your finances could make lenders unwilling to work with you.
7. Industry Risk
Some lenders tend to be more cautious about businesses who operate industries with high unpredictability such as construction and restaurant. They worry you may not be able to meet your payment schedule and default on the loan because of unforeseen situations
8. No Concrete Business Plan
Lenders need to know they can trust you with their money thus it is recommended that when you apply for a loan, you have a business plan that details how, when and where you are going to spend the money. Without a clear financial direction your business will be stuck in an island that no lenders want to reach.
Next steps after application rejection
Applying for a loan is not just a matter of numbers and ratios. When lenders see the the numbers, they are able to gauge your financial management ability. To improve your approval chances after being declined, here are several practical measures to get you started.
Keep your business operating so that you can build the necessary rapport in terms of managing your business finances and build your business credit score at the same time. If you do not want to wait to get funded, consider applying for a startup business loan, small business grant or a business credit card.
Build Your Credit Score
One of the most common advice to build your business credit score is by promptly paying your vendors and creditors. However, that is only half of the story. Make sure that your vendors report the payments to the credit bureaus to build your credit report. A business credit card will help you build your credit on smaller expenses.
Build Your Revenue
Take a look at your current ratio to determine if your business could benefit from improving how you manage your assets. For example, does the number of days between deliver and collection hold back your revenue? Maybe set up an installment payment system or faster collection. Subsequently, do not overlook the revenue boosting potential from upselling.
Keep in mind that there are loan products for almost every situation and business need so being declined for one type of loan doesn’t necessarily mean your business is not fundable.
If your application for a specific loan gets denied, use it as an opportunity to review your business operations to strengthem your case on the next try. As you improve your business effectiveness, you are will have the finances to back up your loan application