Wondering why a lender didn’t want to do business with you? Here’s what might’ve gone wrong with your application.
Business owners need financing for a range of reasons, from cash flow problems and debt consolidation to expansion and purchasing new stock and equipment. Whatever reason you’re applying for a business loan, it all comes down to a lender’s confidence in your ability to repay the loan.
“Why was my business loan application rejected?”
This is a question you might be directing at your lender but not getting a detailed response. Understanding why your business loan was rejected can help you when you next apply for financing as you’ll be able to improve your application for the next lender.
Here are four common reasons why businesses get turned down for credit:
While there may be bad credit business loans available, negative marks on your credit file can usually cause you to be rejected from receiving a traditional business loan. If you’re unable to honor the financial commitments you already have, lenders are unlikely to approve your application for an additional loan.
Make sure you check the eligibility criteria set out by the business lender or check with the lender directly to see if your credit history might be a problem.
Lenders usually check the personal credit score of the CEO or president of the business when evaluating the loan application. A good personal credit score is typically 680 or higher. You can check your credit score online and get free copies of your personal credit report each year. This way, you’re able to check for possible errors or see where you can reorganize your finances to improve your credit rating.
Lenders can also check the business’s credit file for financial details such as existing credit accounts and potential defaults. Your business credit score ranges from 0 to 100.
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Cash flow issues
Many businesses have cash flow problems from time to time, but if your business spends too much time in the red it can mean your loan might not be approved. If lenders see that there’s no money for day-to-day operations, it shows that you’re not in a position to make repayments on a loan.
It’s also important to note that good cash flow doesn’t automatically qualify you for a loan. The amount of time you’ve been in business is a major consideration. Banks and alternative lenders tend to require you to have been in business for at least a year. It’s a good idea to research loan options and their requirements to find out which ones your business is eligible for.
Banks usually require security for business loans, so not holding a personal or business asset such as property, a vehicle, retained income or another investment can cause your application to be rejected.
Before submitting your business loan application, you may want to look into what can be considered collateral. Using the assets you already own as security is a good way to improve your application and eventually grow your business.
There are also a growing number of alternative lenders offering unsecured business loans.
Applying with the wrong lender
Sometimes the reason your loan is rejected is that you simply applied with the wrong lender. Financial institutions have varying lending criteria, so while a traditional bank might not grant you a loan, you might qualify for a loan from an online direct lender or peer-to-peer lender.
However, if your application was rejected, you could represent a higher risk when you apply elsewhere. While certain providers may be more lenient than others, you might have to settle for higher rates and fees due to the multiple recent inquiries being listed on your file.
Steps to take after rejection
- Find out the exact reason you didn’t qualify. The first thing you should do is contact the bank or lender and find out specifically why your application was rejected. Business loans are usually rejected because the business doesn’t meet the eligibility criteria. But it could be a simple error in your paperwork that you could correct.
- Build your credit. Other than shopping around for loan criteria that you do meet, an advantageous thing you can do is make sure that you’re in a position to make repayments and that you have a positive credit profile. Next, work on building your business’s credit by staying on top of payments, maintaining healthy relationships with vendors and by knowing your score and actively trying to improve it.
- Look into crowdfunding. If you’ve exhausted business loan options from traditional and peer-to-peer lenders, you could always turn to crowdfunding. Crowdfunding can have multiple benefits for your business, it can get people talking about your company in addition to raising additional funds.
- Raise funds from family and friends. Finally, you could reach out to family and friends. They may be excited and truly believe in the direction you want to take your business. This option has the possible advantage of no interest, but can sometimes damage relationships if what has been lent isn’t paid back in time.