8 Reasons Why Small Business Loans Get Rejected
Getting a rejection on your small business loan application can be disheartening, but it’s essential to understand the reason behind those rejections.
The lenders have several reasons to deny your small business loans. To reduce risk, traditional lenders typically use strict criteria and credit-lending limitations. The easiest way to prevent small business loan rejection is to be aware of the traits lenders deem as warning signs.
Here are a few reasons why small business loans get rejected-
1. Poor credit history.
Lenders see credit scores and credit reports to assess the risk of lending money to a business. A low credit score or poor credit history can indicate that the business needs to pay its debts on time. It can be a significant factor in denying a small business loan.
Creditworthy borrowers are typically those who have FICO scores above 670. FICO recommends a few simple ways of improving your score:
- Paying your bills on time.
- Keeping your credit balances low.
- Opening only as many credit cards as you intend to use.
Lenders consider a business with poor credit scores a high-risk investment. This makes it challenging to secure a loan from traditional lending institutions. Alternative lenders may consider loan applications from businesses with poor credit histories, but they may charge higher interest rates or require more collateral.
Small businesses with poor credit history may have to consider alternative funding options, such as microloans, offering more flexible terms.
2. Recent bankruptcy.
A recent bankruptcy can be a major obstacle in getting a loan. Lenders may not consider businesses that have recently filed for bankruptcy.
Some common reasons why small business owners file for bankruptcy include the following-
- Unexpected expenses that are hard to pay off.
- Decrease in customer volume and sales.
- Inability to make payments for critical services that help keep the company operational.
When a business files for bankruptcy, it admits that it can no longer pay its debts and meet its financial obligations. This can raise red flags for lenders. Additionally, bankruptcy can negatively impact a business’s credit score.
Businesses may take time to rebuild their credit before they can qualify for a traditional loan after bankruptcy. Companies that have recently gone through it may have to consider alternative lending options. These options include money-borrowing apps like Lendee or other online platforms that lend money.
3. Short time in business.
There is no set time frame for a financer to reject a small business loan. Before accepting a loan application, lenders typically consider the borrower’s creditworthiness, the business’s financial health, and the loan’s purpose.
New businesses with minimum financial history can be a higher risk for lenders and are more likely to lose loan approvals. However, lenders may also consider the business owner’s experience and qualifications and the potential for growth in the industry.
Lenders typically base their choices on previous financial results. Recently established companies don’t have a long financial history, so they have fewer chances of loan approvals.
4. Inconsistent cash flow.
It can be a major concern for lenders when evaluating a small business loan application. Lenders want to ensure that the business can make regular loan payments. Inconsistent cash flow indicates that the business may need a stable source of income.
Lenders may be hesitant to lend to a business with a history of financial instability. It may indicate that the business needs to be well-managed or that the industry is not profitable. Additionally, if the business doesn’t have a solid plan for generating consistent cash flow, the lender may view it as a risky investment. Getting loan approval may take a lot of work if the business has a history of inconsistent cash flow.
However, a lender can approve the loan if he sees future profitability potential, despite inconsistent cash flow. The borrower can present a feasible plan to improve cash flow.
5. Unpredictable business.
An unpredictable business can be a high-risk investment for lenders. They want to ensure that the business can make regular loan payments. A business operating in an unpredictable industry may have more chances for default.
Unpredictable business can also mean that the company needs a clear financial history. It may have income, expenses, and cash flow fluctuations, making it difficult to assess its creditworthiness.
Moreover, if the business does not have a solid plan for navigating, it may have fewer chances of getting business loans.
However, even if a business is unpredictable, it may still be approved for a loan through online microlending platforms or websites.
6. Less collateral value.
Collateral is a form of security that a lender can seize in case a borrower cannot repay a loan. Lenders often require collateral to minimize the risk of a loan default. If a small business has more collateral to secure a loan, it is easier for them to get approval.
When a business applies for a loan, the lender will evaluate the value of the collateral against the loan amount. However, if the collateral’s value is insufficient to cover the loan amount, the lender may be less likely to approve the loan.
You can overcome this obstacle by selecting a lender that provides unsecured business loans. Numerous alternative lenders also offer funding without collateral. Unsecured loans, on the other hand, carry enormous risks for lenders, and as a result, they frequently have higher interest rates and costs.
7. Existing debt.
It can be a concern for lenders when evaluating a small business loan application. Lenders want to ensure that the business can make regular loan payments. If a business has a high level of existing debt, it may have more chances for default.
When a business applies for a loan, the lender will evaluate its debt-to-income ratio (DTI) to determine its ability to take on additional debt. A high DTI indicates that a business has a large amount of existing debt relative to its income. This may be another reason that makes loan approvals challenging.
Additionally, the lender can check the business’s credit history to see if the business has a history of needing help to make payments. This credit history could make the lender reject the small business loan.
8. Lack of documentation.
This can be a major concern for lenders while lending small business loans. Lenders typically require various financial and operational documents to assess the business’s creditworthiness.
The documentation for a small business loan can vary depending on the lender. Some standard documents may include the following:
- Credit reports.
- Balance sheets.
- Profit and loss statements.
- Cash-flow projections.
- Articles of incorporation.
- Business contracts.
These documents give lenders a complete picture of the business’s financial health.
The business needs to have all the necessary documents ready before applying for the loan to increase the chances of loan approval. If a business doesn’t have the required documentation, it may need to look for alternative financing options.
Applying for business loans can be challenging for some businesses. Rejections can happen, and they can be frustrating. However, by understanding the most common reasons for rejections, you can fix them and improve your chances of approval.
Furthermore, you can apply for business loans online through money-borrowing apps to increase your chances of getting approvals. There are multiple options available like Lendee. Download the Lendee app to get a small business loan without fearing rejection!