What might have gone wrong — and what you can do about it.
Luckily, there are some steps you can take to up your chances of approval next time around — like finding out why your application was rejected.
Why was my business loan application rejected?
The reason your application was rejected depends on you and your business’s unique circumstances, as well as the lender.
Some lenders might automatically give you the reason your application was rejected online or in the mail. If not, you might have to file a request to learn what went wrong. You can find out by reaching out to customer service.
Why does it matter?
Understanding why your business loan was rejected is the first step in getting approved for financing next time around. It tells you what your weak points are and guides you toward the steps you can take to improve your personal and business finances.
5 top reasons lenders reject business loan applications
Here are five main reasons lenders rejected business loan applicants, according to a 2016 survey by the federal reserve.
- Weak business performance: 31%
- Not enough collateral: 31%
- Low credit score: 29%
- Already carrying too much debt: 28%
- Short credit history: 28%
Source: https://www.newyorkfed.org/medialibrary/media/smallbusiness/2016/SBCS-Report-EmployerFirms-2016.pdf (p. 18)
Weak business performance
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. A low revenue, cashflow gaps and other problems that a loan can’t fix are all red flags for lenders.
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.
Not enough collateral
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.
Low credit score
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.
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.
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.
Already carrying too much debt
In addition to revenue, lenders also consider your business’s monthly debt obligations when you apply for a loan. If it seems like it can’t afford another monthly payment, you might not get approved for a loan.
Your lender might also consider your business’s total credit utilization ratio — how much debt it has compared to how much it could potentially access through credit cards or lines of credit. A high credit utilization ratio could also get you rejected, even if your monthly payments are negligable.
Short credit history
While not as important as your credit score, the length of your personal and business credit history is also a factor in your business loan application. You might not get approved if your personal credit history is less than three years long. You could also get rejected if your business’s credit history is less than a year.
More reasons applications get rejected
- Time in business. Banks and alternative lenders tend to require you to have been in business for at least a year — or three at some more selective firms.
- High-risk industry. Lenders consider some industries to he high-risk. If you work in an industry like trucking, gambling or cannabis might not be eligible for a business loan due to a high rate of failure or legal gray areas for businesses of that type. Regardless of individual financial situations.
- Wrong type of lender. Some lenders reject businesses at a higher rate than others or have tougher requirements. If you applied with a national bank or credit union, you might want to consider going local or applying online next time.
- Wrong type of financing. Some types of financing are also simply harder to qualify for than others. SBA loans, have much more stringent requirements than other types of business financing, as the graphic below shows.
Approval rate by loan type
- Vehicle and equipment loans: 79%
- Merchant cash advance: 72%
- Line of credit: 68%
- Term loan: 58%
- Personal loan: 57%
- SBA loan: 55%
Source: https://www.federalreserve.gov/publications/files/sbfreport2017.pdf p.21
You might find easier approval with a business loan backed by some form of collateral — be it a car, a tractor or your business’s future sales. It’s less risky for the lender because it won’t have to take the financial hit if your business defaults.
My application was rejected. What can I do?
- 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 personal 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.
- Build your business credit. 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.
- Put up collateral. Unsecured loans put the responsibility of your debt on the lender if your business goes under, they often come with tighter eligibility requirements. Putting up collateral can ease that responsibility.
- Look into crowdfunding. Crowdfunding can have multiple benefits for your business, like spreading the 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.
There are several reasons why your business loan application might have been rejected. But everyone’s experience is different. If you weren’t able to get a loan, the first step you might want to take is to find out what went wrong. You can learn more about your financing options by checking out our guide to business loans.