A timely business loan is a boon for small businesses. It can help companies to capitalize on market opportunities, increase profits, and grow their business.
To see your business loan application getting rejected may feel devastating, especially when you were counting on it to meet various financial commitments. Hearing a “no” or denied from the lender may seem like a dead end. But that isn’t the case.
Understanding why your loan proposal was denied can help you rectify the mistake and improve your loan prospects in the future. You can apply again and turn the tide in your favour when you know the reason for the initial rejection.
Here, in this article, we walk you through the top likely reasons why your business loan application may have been rejected and what you can do to avoid making the same mistake again.
8 Reasons Why Your Business Loan Application may have been rejected
#1: Poor Credit Score
The primary reason for most loan rejections, including business loans, is a low credit score. The credit score is a numerical indicator that determines the creditworthiness of the borrower. Different lenders have varying criteria for what is a good credit score. When you apply for a business loan, the lender generally considers your company’s credit score as well as your personal credit score.
How to rectify it?
If you suspect that a low credit score may be the reason why your loan application was turned down, here are a few steps to help you get back on track:
- Start by reviewing your latest business credit score and personal credit score.
- When you check your credit score, the score does not drop, so you need not worry about checking your score often.
- Once you have the scores in hand, you can take the right steps to repair them. Here are a few ways to boost your credit ratings:
- Repay your credit card dues, loan EMIs, and other debts on time
- Lower your credit utilisation ratio
- Exercise caution when taking on new credits
- Look for any credit errors and get them rectified.
While it may not be possible to boost your credit scores overnight, you can improve them by taking the right corrective action. Wait until your credit scores have sufficiently recovered before applying for a business loan again.
Very often, poor or low credit scores are the culprit for business loan rejections. It’s highly recommended that you improve your credit scores before applying for any loan. Having a good credit score not only enhances your chances of loan eligibility but also secures favorable loan interest rates.
#2: Not Enough Business Experience
Most lenders have a business history as one of the eligibility criteria for a business loan. If you’re a new business yet to get started or with minimal operating experience, then the lender may not sanction your loan application.
How to rectify it?
If you’re just getting started, then you can consider other credit options like Mudra loans, loans for startups that grant loans to new businesses with no experience.
#3: Too Much Debt
Having too much debt is another red flag that puts off lenders. When you have multiple ongoing loans, it causes the lender to be worried about on-time repayments. They are likely to be worried that you won’t repay the EMIs on time and run the risk of defaults.
How to rectify it?
Try to foreclose other ongoing loans before applying for a new business loan. Ideally, your debt utilisation ratio should be less than 30% of your income to improve your loan sanction chances.
#4: Poor Cash Flow
When you apply for a business loan, the lender will ask you to provide supporting documents like profit/loss statements for the last few years, annual turnover records, etc. This documentation helps the lender evaluate the financial strengths of your company. If these documents show a negative cash flow or low turnover, the lender may not sanction your loan.
How to rectify it?
Here are a few ways to improve the cash flow of your business:
- Cut out unnecessary expenses
- Maintain proper records to show cash inflows and outflows
- Build an emergency fund that you can use to boost your working capital
#5: Lack of a Business Plan
Some lenders require you to submit a business plan while applying for a loan, while others do not have this requirement. However, it’s prudent to have a well-developed business plan in hand while applying for a business loan.
How to rectify it?
A concrete business plan shows the lender that you’re serious about the loan application. It helps to tip the scales in your favour.
#6: You have applied for the Wrong Type of Business Loans
Business loans are of multiple types. Applying for the wrong kind of business loan can cause your loan application to get rejected. For example, suppose you wish to purchase any equipment. In that case, equipment loans work better than merchant cash advances or applying for a term loan.
How to rectify it?
Make sure to brush up on the different types of business loans, so you can apply for the right loan type and improve your chances of loan sanction.
#7: You Applied with the Wrong Lender
Different lenders have varying eligibility requirements. Traditional lenders like banks have strict eligibility conditions, while digital lenders are more relaxed with their eligibility requirements.
How to rectify it?
Instead of applying separately with multiple lenders, make use of trusted third-party loan aggregators.
#8: Incomplete Documentation/Application
One of the most common (and easily corrected) reasons for business loan rejections is that the borrower didn’t complete the application or failed to provide the necessary supporting documents.
How to rectify it?
The fix for this problem is relatively easy. Before you apply for a business loan, make sure to collect all the required documentation: bank account statements, IT returns, id and address proof, SSN, proof of business ownership, etc. Double-check the application form to see if you have provided all the required details.
A Loan Rejection is not the End of the Road
Having your loan application rejected is disappointing. However, it doesn’t mean that you cannot ever get a loan in the future. Analyze the reason for rejection. If possible, you can always connect with the lender to know the precise reason why your application was rejected. Once you find out the reason for loan denial, use the tips listed here to get it corrected and apply again after rectifying your initial mistakes.
Danis Woods in Businessman, investment banker and stock exchange traders. On the same time he loves writing financial blogs to shed lights on different aspects that new and existing businessman are not aware of.
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