When beginning a business or expanding an existing one, business loans are frequently used to finance expenses such as purchasing merchandise, purchasing equipment, renting office space, hiring staff, and paying for various other expenses. On the other hand, it could be challenging for young enterprises to obtain business loans.
When a lender rejects your application for a small business loan, it might be upsetting, but you are not alone. There are several reasons why a lender can reject your application for a business loan, but you can spot these red flags in advance. You can make plans to remedy any issues once you are aware of the reasons why lenders reject small business loan applications.
Common hurdles to overcome
Reputable Business Credit
Your business credit score and credit record may be one of the most important factors when applying for a small business loan. A bad credit score prevented 20% of small business owners from obtaining financing, according to a National Small Business Association poll. Your business’s credit history provides lenders with insight into how you’ve managed credit obligations in the past and determines if you’ll be able to make payments on time. When applying for a small business loan, it’s a good idea to check your company’s credit reports to make sure they’re in good standing. If you don’t like what you find, you can come up with future ideas to increase business credit.
Bad personal credit
Small business owners and their operations are frequently and intimately interwoven. Therefore, it seems to sense that a lender would want to look at how you handle your credit to get a loan. Some business loan applications could be rejected if the applicant has a low personal credit score. For instance, it’s common for business entrepreneurs to have high mortgage debt. According to Statista, the total amount of mortgage debt in the US was $16.01 trillion in 2021. These business owners might be able to obtain a loan despite having bad credit, but they can expect to pay higher interest rates and fees. Focusing on improving their credit score is the best course of action in the long run.
Fewer Customers in One Place
Banks are typically hesitant to lend money to companies that claim a sizable portion of their revenue comes from a select group of customers. Instead of always dealing with the same customers, lenders prefer to see a company’s clientele as broad as feasible. Small bars and restaurants that primarily rely on their “regulars” for consistent business may have issues with traditional banks. To prevent this, make sure to expand your customer base so that a small number of customers do not account for the majority of your revenue.
The Ratio of Debt to Income
Banks are reluctant to make loans to businesses that have outstanding debts to other lenders. They frequently won’t think about financing a business that has already taken out a loan. When applying for a traditional bank loan or cash advance, can be extremely difficult because many SMB owners look for financing from several sources, especially at the beginning of the firm. Therefore, companies must monitor their debt-to-income ratio to ensure that it doesn’t represent a threat.
Also read: Need New Business Loan? Here’s What You Need to Know
No collateral
The lack of appropriate collateral prohibits SMBs from obtaining financing because loan applications often ask for legitimate collateral to close the deal and collect cash. For large enterprises with real estate or other high-value assets, this isn’t an issue, but for tiny businesses, this can be an impossible challenge.
Bottom line
Due to the rigorous application procedures and requirements, business loans are frequently challenging to obtain. However, by making sure that your application is thorough and convincing, you can succeed. As an alternative, companies could look into less stringent alternative funding arrangements.
Ready to grow your business? Speak to our growth experts and learn how to expand your customer base, drive revenue growth, and optimize your business operations.
