If you’re a business owner, chances are you’ve been in a position where a bank or other lender turned down your application for a small business loan. It’s never fun to be rejected, but there are some good reasons why your application might have been denied.
In this post, we’ll go over some of the most common reasons why small businesses don’t get approval for financing requests and help you understand how to prevent them from happening in future applications:
4 Reasons Work Behind Your Small Business Loans
To get a small business loan, your paper works should be perfect. But along with small business loans, there are certain types of precautions that you have to take.
As small businesses, loans always require stronger documentation and paperwork. But denied chances are always there. If your paperwork is not that up to the mark, there are always chances of denying the loan.
Here are four reasons why your small business loans can be denied.
1. You Need To Build Your Business Credit
A common misconception is that business credit is the same as personal. While it may seem like getting a loan would be easier if you already have good credit, that’s not how things work.
The two types of credit are separate, and you will need to build your business’s credit history before applying for a small business loan. As per the experts at Lantern by SoFi, “The type of loan you choose may determine what specific expenses you can address with the funds.”
To build business credit, pay all your bills on time—including rent, utilities, and other expenses related to running your business.
You can also get a business card through your bank or another financial institution so that they can monitor how often payments are made on time and in full each month (and thus give them a sense of whether or not they’d want to lend money).
2. You Don’t Have Enough Collateral
If your business is a startup or if it’s been around for a while but has been struggling financially, you may not have enough collateral to secure a small business loan. Collateral is something that can be sold to pay off a debt; in this case, it’s typical property (like real estate) or equipment.
If your business isn’t profitable enough yet and doesn’t have much property or equipment worth selling at this point, lenders will likely deny your application for funds because they don’t feel comfortable extending credit without collateral.
3. Your Business Hasn’t Been Around Long Enough
There are a few reasons why your small business loan could have been denied. One of the most common issues is that your business isn’t new or established enough to qualify for a loan (or at least this is what lenders think).
Lenders want to see that you’ve been in business for at least two years before they will consider giving you a loan, and it helps if you have past performance as well.
4. You Don’t Have Enough Cash Flow Or Revenue
If you don’t have enough cash flow or revenue, you risk being unable to pay back the loan. Cash flow is the money that comes in and goes out of a business, while revenue is the money that comes in from a business’s customers.
If your small business loan does not have enough cash flow or revenue to cover its expenses, then it will not be able to repay its loan—no matter how great your credit score may be!
There are many circumstances where lenders may not be able to approve your application. While it can be disappointing, it’s important to understand why these situations can occur so that you can make sure they don’t happen again in future attempts at funding your venture.
What To Do If You Are Rejected From Getting Business Loan?
The business journey is like a bumpy road. Many ups and downs are present there. After one denied loan approval, many of the business handlers think their journey is reaching an end.
Here are some of the tips which you can follow after facing rejection.
- Find other financial resources and lenders.
- Improve your credit balance and reapply for the loan.
- Improve your bank balance.
Wrapping It Up:
A single application denied does not mean all your applications are going to be denied. After one rejection, you can reapply for the loan once again. The other alternative is you can find a personal lender who is willing to fund your small business. But once you maintain a healthy credit limit, there are chances of rejection of your loan approval. So what is your opinion? If you want to share any of the extra points. You can use the comment sections.