8 Common Reasons Small Business Loans Get Rejected
If you own a small business, you know how important it is to have the proper funding. Before you apply for your loan, take the time to learn the most common reasons loans get rejected so you can improve your chances of securing a small business loan. Here are eight common reasons business loans get rejected.
- Poor Credit Score
Your personal credit score can affect your chances of securing a small business loan. A poor credit score indicates problems managing money and makes a bank less likely to lend you money. If possible, try to improve your personal score before applying for a loan.
- New Business
If your business hasn’t been around for very long, a bank may not be willing to lend to you yet. You can help your cause by ensuring your vendors report your on-time payments to the credit agency regularly to improve your credit history.
- Risky Industry
Some industries are historically more risky than others for investors. You may be able to find lenders who specialize in your industry.
- No Collateral
Traditional loans require collateral that reaches a certain percentage of the amount of the loan. If you don’t have enough of the right kind of collateral, you might want to apply for an unsecured loan or invoice-based financing.
- High Debt to Credit Ratio
It doesn’t look good to lenders when you use a high percentage of your credit amount. Traditionally, you should keep your debt to about 30 percent of your total available credit.
- Cash Flow Issues
One of the first things lenders look at when considering a loan application is your business’ cash flow. You need to ensure you have enough money coming in so you can make your loan payments. You can use accounting software to track and project your cash flow, provided you update the information frequently.
- Small Loan Amount
It may seem counterintuitive, but you actually have a larger chance of having your loan approved if you ask for a high amount. Small loans don’t give enough return on investment once banks calculate all the time and money spent servicing the loan.
- Incomplete Application
Surprisingly, loans often get rejected because the paperwork was filled out incorrectly or the borrower didn’t include all the necessary information or documentation. It’s always good to double check that you’ve followed all the instructions before submitting your application.
A small business loan can be a lifeline for your business and you want to do everything you can to make sure your application is approved. If you avoid the most common mistakes, you’ll increase your chances of getting the financing you need.