4 reasons why your small business loan could be rejected

Let’s face it. We all need loans to keep growing our businesses and if you’re a small business owner, then you will know how important it is to get your loan approved. And for whatever reason, if it gets rejected, then you feel stuck in limbo. But, hang on, you’re not alone! According to the Biz2Credit Small Business Lending Index, almost 3/4 of small business loan applications are rejected by large banks, and about half are rejected by small ones. While the reasons for rejection could be manifold, and specific to the business, we can, however, generalize the four most common reasons.

1. Issue with credits

Every business owner has two credit reports – one is your personal credit report and one is your business’s credit report from credit bureaus like Experian, Equifax, and Dun & Bradstreet.

If you have done late payments or had a high use of available credit, it can lead to a low credit score. Not just that, if you don’t have a long credit history to show to your lender, it can backlash you.

However, there is good news too. You can turn around your low credit score by paying your bills on time, keeping account balances low, and repaying debts. If you wish to establish a credit history then here are some handy tips for you:

  1. Get your business registered with Dun & Bradstreet to get a free DUNS Number
  2. Use a business credit card
  3. An EIN or Employee Identification Number always helps
  4. A business bank account under the name of your business is always helpful to establish a credit history

If you stick to these tips and follow them religiously then you can establish a business credit score that will help you to get your loan approved; sometimes even at a better rate!

2. Are you having sufficient collateral?

Yes, you read that right. Lenders give an edge to borrowers who have assets to offer as collateral which they will forfeit if they are loan defaulters. So, remember to make a list of all your assets, both personal and business. You can then make a decision on which one you want to use for securing your loan. You should make an informed decision keeping in mind the likelihood of default and what would be the consequences if the asset is forfeited. Consider business assets like equipment, real estate, vehicles, and even accounts receivable as your loan collateral.

3. Pay attention to the amount of your loan

Remember lenders will check if you have got enough cash flow to make loan repayments. Hence, it is important to know your debt-service ratio before you apply for the loan. Calculating this is easy. Divide your annual net operating income with your annual debt payments. The higher the value you get, the better it is for you. An online calculator can help you calculate accurately if you’re falling behind or overreaching the loan amount. If you think you are falling behind and feeling forced to apply for a bigger amount than your actual requirement, consider other lending sources like angel investors, crowdfunding, or even an SBA microloan.

4. A business plan is a must!

Do you have a sound business plan in place? A sound business plan is a key differentiator for lenders to figure out if your company is a good investment and lenders review it minutely while considering your loan application. Hence, pay extra attention to your business plan if it wasn’t up to snuff the last time. Apart from jotting down an elaborate description of your company and your service offerings, including a solid sales and marketing plan. SBA strongly recommends including a market analysis, an appendix with supporting documents, and financial projections that are realistic and based on your budget, balance sheets, and of course cash flow statements.

Applying for a business loan is difficult and getting it approved is further difficult. But it is not impossible. Keep your credit limit at a favorable number, make sure the loan amount is realistic, wow your lender with a soundproof business plan, and you will be one step closer to securing your business loan and taking your business to the next level.

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