This article is a look at 7 reasons that are making it tougher for you to get your business loan. *Why* the denial? *What* can you do?
In our country, a business loan is common for all small and medium-sized companies. Why does the process take so much time?
The reason is that banks are not willing to release the loan without satisfying certain conditions. Laws and regulations must be followed in order to gain access to such loans.
The hardest aspect is learning that your bank has rejected your request for a business loan. It can be frightening and stressful, especially if you need the money to launch, expand, or buy merchandise for your company.
There may be a variety of explanations for the application's rejection. However, we'll list the top SEVEN factors that the underwriting considers while evaluating the file, which can make it simple to improve future applications and get approved for the funding you require.
7 Factors That Led To The Denial Of A Business Loan
- Messed-up Credit Score
Credit scores show potential lenders how creditworthy a candidate is and how much danger a borrower poses. When analyzing applications, business lenders consider both personal and business credit ratings, although newer enterprises might have to depend only on the applicant's personal score. In general, to be eligible, potential borrowers must have a FICO score of at least 680.
Damaged credit is one of the most common obstacles to obtaining a small business loan. Your request for a business loan can be turned down if your personal or business credit has been harmed by default, bankruptcy, or even merely missed payments.
Due to this, it would be wiser to select another type of financing, such as a company credit card or merchant cash advance, or to postpone reapplying until your credit is better.
Follow these tips if your loan application was denied due to poor credit:
- Examine your personal and corporate credit reports to find areas that need work
- Catch up on overdue payments to bring your accounts current
- Pay your bills on time to build a strong credit history
- Reduce the frequency of applications to lower the number of new queries on your report
2. Insufficient Time in Business
A minimum period of time in business is generally mandated by business lenders and can range from six months to more than a year. You probably won't meet these requirements if you're looking for funding for a startup or starting a company from scratch.
3. Cash Flow Limitations
Many lenders need applicants to show a minimum amount of monthly or annual revenue in addition to a minimum period of time in operation. This sum varies depending on the lender, loan size, and type of financing, but normally falls between $50,000 and $250,000.
Financial records that show sufficient cash flow to cover running costs in addition to current and future loan payments are required even by lenders that do not set a minimum annual revenue requirement.
4. Not Enough Collateral
Many lenders also use the requirement that borrowers pledge important business assets as collateral to reduce their risk. In the event of borrower default, the lender may attempt to recover the outstanding loan sum by taking possession of the asset. Loan collateral must therefore be valuable enough to cover the total amount of the existing loan. Your loan application can be turned down if your company is young, you don't have any assets to offer as security, or your assets are already committed.
Choosing a lender that offers unsecured business loans can help you get past this hurdle.
5. Missing Documents or Information
The finest small business loans have a simple, simplified application process. However, many lenders have difficult application processes and frequently need a lot of supporting evidence.
As part of the application screening process, the majority of lenders get in touch with applicants regarding unmet requirements. As a result, it's critical to keep an eye out for correspondence from the lender on your phone and email.
These are some of the most common documents requested during the business loan application process:
- 6 Months of Business Bank Statements
- Latest 2 Years Business Tax Returns
- Financial statements: including P & L statements, Business Debt Sched.
- Relevant legal documents: inc. EIN/ SS4 Form & Articles of Incorp.
6. Too Much Existing Debt
The percentage of a business's credit limitations that it is currently utilizing is known as the debt usage rate (or credit utilization rate). Lenders generally desire debt utilization rates of less than 30% for applicants. If your company has a higher credit usage rate, it can be considered too dangerous and maxed out to be approved for a loan. Consolidate your existing debts and build a reliable payback history.
7. Risky Industry
If you work in a high-risk field, it may be challenging to obtain a company loan, regardless of your qualifications. For instance, because of their higher failure rates and potential for uncertain revenue, restaurants are often viewed by lenders as riskier than other business categories. Likewise, a lot of lenders won't give money to companies that are involved in farming, building, growing marijuana, or other so-called vice sectors like gambling.
You can switch lenders, but you can't switch industries to meet lender requirements. Numerous alternative lenders target riskier businesses and provide financing options that are more appropriate for those companies.
Can I get a business loan with bad credit?
Yes, credit ratings as low as 500 can be used to obtain a business loan. A different option like invoice factoring, merchant cash advances, or revenue advances can be your best bet if your credit score is low—under 580.
What can you do if you’re denied a business loan?
You have the right to a notice of denial, which can come from the SBA or your lender if your application for an SBA loan is rejected.
If, however, you are turned down for a small business loan by an online lender or another financial institution, get in touch with them to see why. They might have suggestions for how to raise your chances of approval in the future.
Once you are aware of the reasons your loan application was denied, take action to address the underlying problems.
Get a business loan with no hassles: The process is simple and free. Only need to fill out an online loan application. Simple, quick, and free
Bottom Line
More and more business lenders are rejecting many credit applications, especially those in smaller firms.
This article is a quick summary of the key points in this section. We aim to point out the reasons why your business loan was denied and give you an idea of how to make things right with your financial institution, while they are still able to approve your application.
Also Read: What is the SBA 504 loan program?
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