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Finding out that your business loan was denied can be frustrating and scary — especially if you need the funds to start your business or continue operating. Luckily, there are a few common reasons business loans are rejected, and this can make it easy to strengthen future applications and qualify for the funds you need.
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1. Damaged Credit Score
Credit scores demonstrate to lenders how creditworthy an applicant is and indicate the level of risk posed by a borrower. Business lenders look at both personal and business credit scores when evaluating applications, but newer businesses may have to rely solely on the applicant’s personal score. In general, prospective borrowers should have a FICO score of at least 680 to qualify.
One of the most frequent problems of getting a small business loan is damaged credit. If your business or personal score has been damaged by default, bankruptcy or even just late payments, your application for a business loan may be denied. Some lenders impose lower score requirements, but these options typically come with much higher interest rates.
For that reason, it may be best to choose an alternative form of financing — like a business credit card or merchant cash advance — or wait to reapply until you improve your score. Follow these tips if your loan application was denied due to poor credit:
- Review your business and personal credit reports to identify areas for improvement
- Bring your accounts current by catching up on past-due payments
- Make on-time payments to establish a robust credit history
- Take advantage of prequalification tools to see whether you’re likely to qualify for a loan based on your personal score
- Limit the number of new inquiries on your report by reducing the frequency of applications
2. Insufficient Time in Business
Business lenders typically impose minimum time-in-business requirements anywhere from six months to more than one year. If you’re trying to get money for your startup or build a business from the ground up, you likely won’t meet these minimum qualifications. Likewise, if you meet the minimum time-in-business requirements but do not have adequate financial records, your loan application may still be denied due to insufficient time in business.
Keep in mind that minimum time-in-business requirements vary both by lender and financing type, so research options before applying. If you have already been denied a loan due to insufficient time in business, research alternative loans with less stringent requirements. Alternatively, consider waiting to reapply and bootstrap your business for as long as possible.
3. Cash Flow Limitations
In addition to requiring a minimum time in business, many lenders require applicants to demonstrate a minimum amount of monthly or annual revenue. This number depends on the lender, as well as the loan amount and type of financing, but it typically ranges from $ 100,000 to $ 250,000.
Even lenders who do not impose a minimum annual revenue require financial documents that demonstrate adequate cash flow to cover operating expenses plus current and future loan payments.
If your loan application was denied due to insufficient cash flow, take steps to better understand your business’ revenue and expenses. This may include using accounting software to monitor weekly cash flow and generate cash flow reports and projections. Not only can this strategy help you qualify for future loans, but it can also give your business a greater likelihood of long-term success.
4. Not Enough Collateral
Many lenders also hedge their risk by requiring borrowers to secure loans with valuable business assets. In case of default borrower, the lender can seize the asset in an effort to recoup the outstanding loan balance. For that reason, loan collateral must be of sufficient value to cover the outstanding loan amount. If your business is new and lacking collateral — or if your assets are already pledged — it may result in a denied loan application.
Choosing a lender that offers unsecured business loans can help you get past this hurdle. Many alternative lenders also provide access to funds without providing traditional collateral. However, unsecured loans pose greater risk to lenders and often come with higher interest rates and fees to compensate for that risk.
5. Missing Documents or Information
The best small business loans involve a streamlined application process that’s easy to navigate. However, many lenders have complex application forms and often require extensive documentation. Not only can failing to provide all of the requested documents delay the review of a business loan application, but missing documents or other information can also result in a loan being denied entirely.
Luckily, correcting an application that is missing documents or information can be easy. Most lenders contact applicants regarding outstanding requirements as part of the application review process. For that reason, it’s important to monitor your phone and email for communications from the lender. If, however, your application has been denied due to missing information, compile the most common application documents before reapplying.
These are some of the most common documents requested during the business loan application process:
- Personal and business bank statements
- Personal and business tax returns
- Financial statements, including profit and loss statements
- Relevant legal documents, including business licenses and articles of incorporation
- Business plan demonstrating how the business makes money, including projections
6. Too Much Existing Debt
A business ‘debt utilization rate — or credit utilization rate — is the portion of a business’ credit limits it is currently using. Generally speaking, lenders prefer an applicant’s debt utilization rate to be under 30%. If your business has a higher credit utilization rate, it may be viewed as maxed out and too risky to qualify for a loan.
Conversely, some lenders refrain from lending to businesses that cannot demonstrate sufficient use of credit. While this may be counterintuitive, it is worth remembering that consistent, responsible use of credit signals to lenders that your business can manage debt responsibly and, therefore, poses less risk of nonpayment.
If you’re trying to get a business loan but your business is denied because of a high debt utilization rate, take time to pay down outstanding balances before reapplying for a loan. Businesses with a utilization rate close to zero should start accessing their current lines of credit and establishing a strong repayment history before reapplying for a loan.
7. Risky Industry
Regardless of your qualifications, it can be difficult to get a business loan if you’re in a risky industry. For example, lenders typically consider restaurants to be riskier than other types of businesses because revenue may be unstable and failure rates are high. Likewise, many lenders will not extend funds to businesses in agriculture, construction or so-called vice industries like gambling.
While you can not change industries to satisfy lender requirements, you can change lenders. There are a number of alternative lenders that cater to riskier industries and offer types of financing better suited to those industries. That said, these lenders may require collateral or charge higher rates and fees to make up for the additional risk.
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