Figuring out why your loan application was denied can be complicated, but that’s where Nav comes in. There are a lot of reasons why a business loan application might be denied, but what most small business owners should be asking themselves is, “What can I do to improve the odds of a successful loan application?”
Lenders are basically trying to answer three questions:
- Can this borrower repay a loan? Does this business have the financial means to make each and every periodic payment? Without adequate revenue and cash flow it’s difficult for a lender to approve your loan.
- Will this borrower repay a 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 do the same with a new loan.
- What if something unexpected happens? Lenders don’t want to see you default and they generally don’t even want your collateral, but they do want to know that in the event you do have problems, 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.
How successfully you can answer these questions will not only determine whether or not a successful loan application is in your future, it will also determine the type of loan you may qualify for, the lender that will accept your loan application, and the interest rate (or cost) of the loan you’ll be required to pay. In other words, there is no one-size-fits-all small business loan and depending on how qualified the borrower may be, he or she might have more options to choose from than a less-qualified borrower.
Common Reasons Why Business Loan Applications Are Denied
- You applied for the wrong type of loan.
- The lender wasn’t the right fit.
- Your personal credit score is too low.
- You haven’t established enough business credit.
- You don’t have enough years in business.
- You aren’t in the right industry for that financing type.
- You don’t have a high enough annual revenue.
- You have experienced bankruptcy.
- Your business has had legal action against it.
- You can’t offer collateral on the loan if needed.
We cover each of these potential factors below in detail.
1. What Do You Need the Money For?
Why are you borrowing? What is your loan purpose? The question can be asked several different ways and the more specific and deliberate you are in your answer will not only instill some confidence in the underwriter evaluating your application, it will also help you choose the type of loan best suited to meet your loan purpose.
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 financing you look for. In much the same way most people wouldn’t purchase a car with a 30-year auto loan, it might not make sense to apply for a 10-year term loan to purchase quick-turnaround inventory that will be in and out of your business in the course of a couple of months.
Some lenders are better suited to meet some business needs better than others. So if you go to the wrong lender, even if you are a good potential borrower, you are likely to see your application declined.
2. How Much Do You Want to Borrow?
Many times it’s not that small business owners want too much, but rather they ask for too little.
Loan amount is another clue as to where you should look for a loan. Many traditional financial institutions want to lend $500,000 to $1 million rather than $45,000 to $50,000. Because it costs them about the same to underwrite a $1 million loan as it does a $45,000 dollar loan, it’s not hard to understand why they pursue the larger loans from their larger customers.
If you are looking for $15,000, for example, and apply at the local bank, your denied application could likely be attributed to the loan amount you’re seeking as well as your business and personal credit profile. 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?
For most small business owners in the United States, your personal credit score is going to be part of every small business loan decision a lender makes. And, if you have a poor score, it is not only going to make getting a small business loan more difficult (though there are options), it’s going to likely make any financing you can get more expensive.
Your personal score will help you determine where you should look. Most banks and credit unions are looking for personal scores in the 700s to approve a small business loan; though they will sometimes go as low as 680. The SBAs minimum threshold is around 650. Lower than that and your SBA loan application will be declined.
Many online lenders will work with a borrower even if they have a personal credit score as low as 600—and some will go even lower, but their interest rates will be higher than the bank or the SBA and their terms will likely be shorter. They will also likely require daily or weekly direct debit periodic payments.
There are even some cash advance providers that will work with a borrower if their personal score is in the low 500s, but the costs of the financing will be much higher for those with a score in that range.
A good personal credit score isn’t really a guarantee that you’ll get the small business loan you’re looking for, but it will 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 that will enable them to borrow when they need to and select from the best financing options for their business.
4. What Does Your Business Credit Profile Look Like?
Business credit is very misunderstood by a lot of small business owners. In addition to your personal credit, your business has a credit history too. The business credit bureaus consider things like how your business makes lease payments, pays for supplies, or makes payments on other business debt. Far too many business owners don’t understand their business credit profile and how important it is to build a strong business credit history.
Start with becoming familiar with your profile and then look for ways to build your business credit. Payment terms from suppliers and business credit cards are both good ways to build your credit strength.
5. How Long Have You Been in Business?
Your time in business matters because lenders are looking for a track record that indicates your business will meet its financial obligations. That being said, not all lenders require the same thing.
An idea stage startup is probably the most difficult business to fund a loan. Without a track record or any revenue, it’s hard for a business owner to answer the first question, “Can this business repay a loan?”
That doesn’t mean a loan is completely out of the question. 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, but those options are rare. And business credit cards are another option for a new business, provided the business owner has good to excellent personal credit.
Most banks want to see several years in business before they will approve a loan, but there are alternative lenders online that will work with your business provided you have a year under your belt. There are even a handful that only require six months in business.
In other words, depending on where you apply, your time in business will impact whether or not you get a loan approval with some lenders—even if your business metrics look good.
6. Are You In the Right Industry?
Some lenders prefer to work within certain industries and will automatically reject an application that doesn’t represent that industry. Some industries are considered to be higher credit risks than others so when you are looking for a lender, many publish a list of restricted industries on their public website so you can determine whether or not your loan application will be automatically rejected or not.
Although some industries that are considered higher risk by some lenders, like restaurants, auto dealers, and general contractors, are considered good customers by others. Your local Chamber Members or industry groups could be another good source of information about who is lending to businesses in your industry. Nav is also a good source of that information and can help direct you to lenders who are interested in working with businesses just like yours.
7. What Are Your Annual Revenues and Monthly Cash Flow?
This is how lenders try to answer that first question, “Can you repay a loan?” Lenders look at your revenue and cash not only to determine whether you have the ability to repay a loan, your revenue numbers and your monthly cash flow will help them determine how much you will qualify for (think in terms of 50% to 100% of your annual revenue).
Some lenders won’t approve a loan if your revenue is below $1 million annually, but there are others who only require $100,000. Make sure you know what the annual revenue requirement is before you apply for a loan to avoid a rejection based on your revenue.
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 will make it much harder to gain a loan approval.
Depending on how long ago your bankruptcy was discharged and what your credit behavior has been since then, it is possible to get a business loan if it has been at least a year since it was discharged (there are lenders that only require six months), but don’t expect the bank to talk to you for at least two to five years. What’s more, if your bankruptcy hasn’t been discharged, a business loan is likely out of the question.
9. Does Your Business Have Any Legal Judgments?
Most lenders do not look favorably on any legal judgment or the associated liens. Any open liens resulting from a legal judgment will make it harder to get a loan approval, but any judgment over $10,000 is even more serious.
10. Do You Have Any Collateral?
Not all lenders require specific collateral to secure a loan, but most traditional lenders and the SBA loan guarantee program typically does. The SBA will not always require a borrower to fully collateralize a loan, but they will take all the collateral that you have.
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.
Fortunately, there are lenders that don’t require specific collateral and instead rely on a general lien on business assets and a personal guarantee (along with most traditional lenders) to secure a small business loan.
What Are the Odds of Getting a Small Business Loan Application Approved?
If your loan application wasn’t approved, it might make you feel better to know you’re not alone: less than half of all business owners apply for funding every year, and since 2020, it’s been closer to one-third, according to the Small Business Credit Survey 2021. Of those businesses who do apply, more than 10% don’t receive any funding at all, while only a quarter receive the full amount they apply for.
Most of the loans that are approved go to low-risk borrowers, that is, those with excellent credit. Of course, bad credit doesn’t completely disqualify you — nearly 10% of high-risk borrowers are approved for at least some financing. But you can double those odds to get approved for a small business loan by having at least good credit. Plus, better credit opens the door to lower interest rates and more lending options.
Your chances can improve based on the type of financing you apply for, too: merchant cash advances see much higher approval rates than other types of lending. But this is probably because they have such high interest rates and less favorable repayment terms.
How to Avoid a Business Loan Application Denial
In order to increase your odds for getting approved for small business loans, there are a number of steps you can take.
- Fix your credit. The number one way to lower your risk level is to increase your creditworthiness, as shown on your credit report. Lenders judge your ability to make loan payments based on both your personal and business credit scores — and the higher the numbers, the better the odds. We discuss ways to improve your business credit scores below.
- Double check your documents. Yes, it’s a lot of paperwork, but lenders are not going to look the other way if you failed to provide your income statement, tax returns, bank statements, business licenses, and possibly even your business plan. Make sure you’re giving them every shred of documentation they’re asking for in the application process.
- Increase your cash flow. One of the factors that lenders look at to see if you’re going to be able to make your monthly payment is your cash flow. If you can improve your balance sheet, they’ll improve your chances of qualifying for a loan. Can you add more products or services to increase your revenue, or find new customers? You may consider using a business credit card to help you pay for everyday expenses and increase your cash flow.
- Wait a while and apply again. Time in business is another proofpoint on your eligibility for a loan, and you can take advantage of the wait to work on your business in other ways, like improving your debt-to-income ratio by paying off debts or increasing your cash flow.
- Make sure you’re applying for the right amount. It may be easier to qualify for a lower amount of money than you originally applied for, and you can use a loan calculator to determine just how much you can afford to pay off every month.
- Find a different kind of financing. There are a lot of different loan options and other types of business financing available, and you may just have to find the one that’s right for your business right now. You might consider secured loans, short-term loans, a business line of credit, or even a personal loan. Nav can help you find the financing options you’re most likely to get approved for using our comprehensive algorithm.
Tips for Improving Your Business Credit Score
You can build up your business credit score even if you have poor personal credit. The best way to establish and increase your business credit score is to work with companies that report to business credit bureaus — these are also called tradelines. If you pay the bills to these vendors on time, this positive payment history should get recorded by the credit bureaus and may increase your score. Don’t miss this guide by Nav for a full rundown of how to build your business credit.
Alternatives to Traditional Bank Business Loans
If you continue to get denied by traditional lenders, there are other options that you may qualify for. Here are a few we recommend:
What To Do If Your Business Loan Is Denied
The first step after a business loan denial is to ask the lender why you weren’t accepted. It can be invaluable to learn the reasoning behind their decision so you can take steps to adjust your application for the next time. And the lender is going to be the most likely to know. If the lender won’t tell you why your business loan application was refused, look through our top reasons applications are denied to try to determine the why so you can make changes before applying again.
You Don’t Need to Be a Financing Expert
You don’t need to be a financing expert to secure the right financing for your business, but you do need to be a little more savvy when it comes to where you look and what you ask for. Better yet, that’s why companies like Nav exist—to help you find the right financing for your business situation. Create your free account at Nav.com to see your best options instantly.
Nevertheless, answering the above questions will help point you in the right direction and help you improve the odds of a successful application. Remember, there is no one-size-fits-all solution, so you want to make sure you have a good idea of what you’re looking for, how much financing you need, and what your business and personal credit history looks like before you apply.
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One response to “Why Was My Business Loan Application Denied?”
Hello my SBA loans were denied. I was Day Care Owner, I lost my apartment and my Business because of my credit score