Applying for a business loan can be a time-consuming and difficult process. You have to fill out all the paperwork, provide multiple documents, and go through the review process. So when you find out your application has been denied, it can be discouraging. But why might that happen? To give you an idea of what could’ve gone wrong with your loan application, we’ve put together a few of the top reasons lenders deny business loans.
Inadequate Collateral or Insufficient Cash Flow
The most common reason banks and other lenders reject business loans is inadequate collateral or insufficient cash flow. Collateral is any type of asset that can be used to secure a loan, like real estate, business equipment, or inventory. Cash flow refers to the way in which money moves into and out of a business. Both collateral and cash flow play an important role in demonstrating the financial stability of a business. Adequate collateral provides additional assurance to the lender that they will get their money back, while strong cash flow indicates the short and long-term ability to pay back debt obligations on time. Banks want to make sure that any loan they approve is backed by assets in case the borrower defaults on their loan payments. If you don’t have enough cash flow or collateral to secure the loan, it’s possible that your application will be rejected.
Low Credit Score or Poor Credit History
When considering business loan applications, lenders will also take into account your business credit score and credit history. Lenders generally desire a high personal credit score (often 650 and above) and business credit score (70 and above) as it demonstrates financial responsibility, while lower scores can lead to a loan application being rejected. Similarly, lenders review credit history to identify any past struggles with credit and paying back previous or existing debt. Understanding your credit situation is crucial when you’re preparing to fill out an application and making decisions about how to approach lenders. Make sure that you explain any areas of concern or irregularities so that loan officers can make an informed decision about approving your loan application.
Insufficient Time in Business
It’s important to be mindful of time in business when looking for loan approval. Many lenders like to see that a business has been up and running for at least two years before they consider giving a loan. Time in business is important because it shows lenders that a business is stable, experienced, and well established within the industry. If a company hasn’t been around very long, lenders may be hesitant to approve the loan since they can’t accurately assess its viability and risk. Experienced businesses have time-tested strategies and best practices that they can rely on when things get tough; newer companies may not have this same background knowledge and resources yet. Being mindful and ready to discuss your time in business; lenders will want to know how long your company has grown, its roots, and what kind of track record you have.
For business owners in new or risky industries, like gambling and cannabis, the loan application process can be tricky to navigate. Many lenders have an aversion to these fields due to the associated risk; gambling carries potential losses and regulatory issues in some regions, while the ever-shifting legality around legal cannabis can spell uncertainty for lenders. However, there are certain places where loans for gambling or cannabis businesses can be found, such as specialized lenders who focus on either business type separately. By doing thorough research on loan options available specifically for your company’s industry, business owners may be able to get the loan they need without being denied — plus receive useful resources from specialized lenders.
These are just a few of the reasons why lenders may reject a small business owner’s request for financing. It’s important to remember that every lender has different criteria when it comes to approving or denying applications, so make sure you do research before applying for any type of funding. Today, many small business owners are exploring the idea of working with alternative lenders who may have more lenient requirements and might be able to offer more favorable terms than traditional banks. These alternative lenders include credit unions, community lenders, or non-profit lending organizations. Being aware of what factors are important to a prospective lender when reviewing loan applications can help small businesses better prepare themselves when applying for future loans.