Why was my business loan application denied?

If your business loan application wasn’t approved, it might make you feel a little better to know you’re not alone.  Less than half (41 percent) of businesses surveyed by the Fed reported that they received all the financing they sought. A little over a third (36 percent) received just some of the funding they were trying to get, and almost a quarter (24 percent) received none, according to the Federal Reserve’s Small Business Credit Survey 2025.

The questions most small business owners should be asking themselves when they are turned down are, “Why was my application rejected, and what can I do to improve the odds of a successful loan application next time?” 

Better yet, ask yourself some key questions before you apply to help spot potential gaps in the strength of your application.

Common reasons why business loan applications are denied

All things equal, small business loans are often made to businesses that lenders decide are an acceptable risk. Bad credit won’t completely disqualify all borrowers: some types of financing care more about revenue than credit. But having good credit scores can often help.  

When lenders review applications, they are basically trying to answer three questions:

1. Can this borrower repay the loan? Does this business have the financial means to make each and every periodic payment? If your business doesn’t have a strong track record of revenue (income) and cash flow it’s difficult for a lender to approve your loan.
2. Will this borrower repay the loan? This is a different question and why your past credit history is so important. The lender is trying to judge what you will do in the future based upon what you’ve done in the past. They want to see a track record of successfully making periodic payments because it is an indication that you will likely do the same with a new loan.
3. What if something unexpected happens? Lenders don’t want to see you default. They want to know that if you have problems paying back the loan, there is a way to mitigate their loss. That’s why some lenders require collateral, some require a lien on business assets, and most of them require a personal guarantee.

What do lenders have to tell you when you are turned down for business credit?

There are two main federal laws that require disclosures when credit applications are rejected. One is the Equal Credit Opportunity Act (ECOA, or Regulation B) and the other is The Fair Credit Reporting Act (FCRA). 

Here are some key things to know that apply to business owners vs. consumers:

1. When are free credit reports required?

If an individual applies for a consumer loan, the creditor uses a credit report in the decision. If the application is rejected, or the individual is charged more because of that credit information, the lender is required to provide an “adverse action” notice. It must include the name and contact information for the credit reporting agency that supplied the credit report to the lender. 

The consumer then has the right to request a free copy of his credit report from that agency, and that copy doesn’t count against the one free report she is entitled to each year from each national consumer reporting agency at AnnualCreditReport.com.

Individuals who apply for a business loan, however, are not entitled to a free disclosure of their business credit reports, even if information in one of those reports was used to make the credit decision. 

2. When are free credit scores required?

As a consumer, if you are turned down for credit or charged more because of a credit score, the lender must tell you the score used (the actual number), the range of scores for that particular scoring model, key factors affecting the score, the date on which the score was created, and where the score came from. 

But as a business owner, no such disclosure is required for your business credit reports. 

3. What information do business owners get when their applications are denied?

Business owners don’t get free business credit reports or scores in the case of adverse action, or a lender’s decision to deny a loan application or offer less favorable terms, but that doesn’t mean they are kept completely in the dark. 

What triggers an adverse action notice

There are requirements in Regulation B (described above) that apply to business owners who apply for financing for their small business.

Under that law, adverse action occurs when a creditor:

1. Refuses to grant credit in an amount or with terms substantially similar to what the applicant applied for
2. Terminates an account or unfavorably changes the terms of the account (unless the change affects all or most accounts) 
3. Refuses to grant a credit line increase requested by an applicant 

But there are a few exceptions that do not trigger adverse action notice requirements: 

• The borrower is delinquent or in default, or
• The account is inactive, or
• The creditor makes a counteroffer the applicant accepts

When adverse action occurs on a completed or incomplete application, or on an existing account, the creditor must provide a notice (called an “adverse action notice”), usually within 30 days, or 90 days after a counteroffer that is not accepted. (This applies to business applicants, not just consumers.) 

What’s included in an adverse action notice

Here’s the catch: Creditors don’t have to spell out everything in that notice. 

A creditor must provide its name, address and the statement of action it took, such as rejecting the application. But it doesn’t have to spell out the reasons for taking that action in that letter. 

Instead, the creditor can tell the applicant he has the right to request that information, and provide the name, address, and telephone number of the person or office from which that information can be obtained.

How the notice is delivered

There are two more things to keep in mind: 

1. The adverse action may be given in writing, or verbally. So there may not be a letter or written disclosure at all. 
2. In the case of an application by a business with $1 million or less in annual revenue the preceding fiscal year, the right to receive the reasons for rejection can be provided at the time of application. In other words, the business owner may have to take note of that information when she applies, and then if her application is rejected, remember to follow up on it. 

Some creditors provide all business owners whose applications are turned down with an adverse action notice in writing, but not all do. And as just explained, they may not have to, as long as they provide the information required by law.

What to do about adverse action notices

It is important for you, the business owner, to understand why your application was turned down, or why you were charged a higher rate when you tried to get financing. If your credit scores aren’t strong enough, you can take action to build strong business credit, for example. Or maybe there’s a mistake on your credit reports that, if fixed, could turn the decision around. And lenders may have “reconsideration departments” where a “no” may be turned into a “yes,” or where they can at least make a counteroffer.

So the next time you apply for a small business loan, be sure to take note of any instructions that describe what happens if your application isn’t approved. And if you don’t get the financing you requested, be sure to find out why.

A 10-question checklist to help you prepare for a business loan

Here are ten questions that may help you prepare before you apply for small business financing. 

1. What do you need the money for? 

Why are you borrowing? What is your loan purpose? Try to answer this question clearly, not just to satisfy the lender, but to help make sure you spend your money effectively. 

For example, are you trying to fill a short-term need or a longer-term need? That answer alone could make a difference in the type of small business loan or financing you choose. 

In much the same way most people wouldn’t purchase a car with a 30-year auto loan, you probably wouldn’t apply for a 10-year term loan to purchase inventory that will be in and out of your business in the course of a couple of months.

2. How much do you want to borrow?

Loan amount offers a clue as to where you should look for a loan. Some traditional financial institutions prefer to lend larger amounts – $500,000 to $1 million – rather than smaller amounts – $50,000 to $100,000 – for example.

If you are looking for $25,000, for example, and try to apply at your local bank, you may find your loan amount is too low. 

Fortunately, there are numerous lenders ready and willing to offer you the loan amounts many small businesses are looking for.

3. What’s your personal credit score?

A personal credit score is often checked as part of a small business financing application. If your credit scores are low, you may find it makes getting a small business loan more difficult and more expensive, though you may still have options. 

Your personal score can also help you understand where to focus your efforts to look for financing. Banks and credit unions, including those that make SBA loans, often require personal credit scores of 680–700.

Some online lenders, though, offer financing to borrowers with credit scores as low as 620–650, and some cash advance providers that will work with borrowers with personal credit scores in the 500s, but the cost of the financing is likely to be high. 

A good personal credit score isn’t really a guarantee that you’ll get the small business loan you’re looking for, but it may provide options that a poor credit score won’t. 

With that in mind, every small business owner should focus time and energy in building a strong personal and business credit profile so they have a better opportunity to select from the best financing options for their business.

4. Do you have good business credit?

In addition to your personal credit, your business can have a credit history too. Accounts reported to business credit are referred to as “tradelines” and they can be used to build a credit history when paid on time. 

Payment terms from suppliers or services (also called net-30 tradelines) and business credit cards can be ways to establish business credit. 

With Nav Prime, your payment history may be submitted as up to two tradelines to major business credit bureaus, depending on bureau acceptance.

5. How long have you been in business?

Most lenders will ask how long your business has been established, and some lenders require a minimum time in business ranging from a few months to two years or more. 

Financing for a brand new business can be hard to find, but it may be available if other qualifications (like credit scores) are strong. The SBA, for example, offers some startup financing for small business owners with excellent personal credit who can demonstrate an income of some kind that indicates they can make regular periodic payments. And business credit cards are another possible option for a new business, provided the business owner has good to excellent personal credit and qualifying income from other sources. 

6. Are you in a risky industry?

Some industries are considered to be higher credit risks than others. Industry is often determined by NAICS or SIC codes, and you’ll want to make sure yours are correct on your business credit reports.

7. What are your annual revenues and monthly cash flow?

Lenders may look at your revenue and cash flow to determine whether your business has the ability to repay a loan, and to decide how much your business can borrow.

While there are some lenders that won't offer a loan if your revenue is below $1 million annually, there are others that may require only $100,000 a year. Try to check the lender's annual revenue requirement before you apply, or use a marketplace like Nav to identify potential options. 

8. Is there a bankruptcy in your past?

A bankruptcy doesn’t necessarily mean a small business loan is out of the question, but it may make it harder to get approved. 

Two key factors will be how long ago your bankruptcy was completed (discharged) and whether you have established credit since then. There are some lenders that will offer financing in as little as a year post-bankruptcy, but a couple of years or more is common. 

Similar to bankruptcy, lawsuits and legal judgments can make it more difficult to get approved. 

9. Does your business have UCC filings?

Lenders file UCC liens to alert other lenders that they have a security interest in the property of your business. Multiple UCC filings may hurt your chances of getting approved for future loans, especially if older liens haven’t been terminated.

Unfortunately, lenders don’t always promptly update UCC filings, so you’ll want to check your business credit reports regularly to spot and resolve those that may limit your access to financing.

10. Do you have collateral?

Not all lenders require collateral to secure a loan, but some do. To get an SBA loan, for example, you don’t have to have collateral, but if you do the SBA will likely require you pledge it as security for the loan. 

The collateral requirement can make it difficult even for healthy businesses that just don’t happen to have any assets that could be used as collateral to secure a loan from a traditional financial institution.

If you don’t have collateral to pledge, you’ll need to look for loans that don’t require it. But you may have to sign a personal guarantee instead.

How to help your business avoid a loan rejection

There are a number of steps you may want to consider to help reduce the chances that your application is turned down. 

1. Build good credit. Lenders may judge your ability to make loan payments based on both your personal and business credit scores, and strong credit can make it easier to get the loan. 
2. Double check your documents. Sometimes there is a lot of paperwork involved in the application process. If a lender requests business bank statements, tax returns, or a financial statement, be ready to provide it quickly. See Nav’s business loan preparation checklist to help you get organized. 
3. Focus on cash flow. Lenders may want to verify that you can repay financing from cash flow. Improving cash flow may help you get the loan you need. 

Finally, you can also look for a different kind of financing. There are a lot of different business financing options available, and you may just have to find the one that’s right for your business now.