Have you recently filed for a loan for business expenses, only to be denied? While not getting the capital you need to ensure your business is success is a drawback, know you’re not alone. In fact, 27% of businesses claimed that they have been denied for funding. The good news is that there are often specific reasons as to why your business loan was denied, and more often than not, you can take actions to resolve the underlying issue. Here are 5 reasons why your loan was denied and what you can do about it.
Your credit worthiness has a huge impact on whether or not you’re approved for a loan. Lenders look at your personal and business credit scores to assess your risk level before making a decision. For personal credit score bans look at Equifax, Experian, and TransUnion. To determine your business credit score, Dun & Bradstreet, Equifax, and Experian are used.
If you have bad credit or no credit at all, it’s much harder to get approved for a loan. Your credit standing tells a lender how much debt you have, if you make payments on time, and provides details as to your behavior as a borrower.
There are some actions you can take to build or improve your credit standing. If you’re a new business, time is the biggest factor. It takes time to build credit so you may need to hold off for a year before applying again or find a lender that requires no credit check.
If you have bad credit, you can boost your score by:
- Paying down debt
- Making payments on time
- Staying under your credit limit
- Keeping old accounts open
- Removing any credit history errors
Once your credit health has improved, you can apply for a loan again. Just be weary of applying to loans too close together.
Inconsistent Cash Flow
Lenders feel much safer lending money to businesses that have steady cash flow. Not only do lenders want to see that your business makes enough money to cover monthly loan payments, they also want proof that cash flow is consistent. If your company has slumps and then peaks in cash flow, a lender may view your business as being too risky.
Sometimes cash flow issues aren’t something that you can control. Maybe you’re a seasonal company such as construction or landscaping. If the lender states that cash flow inconsistency is an issue, provide a solid explanation as to why there are slumps and peaks. For some lenders, this may be enough. You may also want to look for ways to boost business income during down periods such as through paid advertisements or partnering with another company.
Little To No Collateral
Most lenders require some sort of collateral to back the loan. Collateral is physical properly that’s used to guarantee a loan if payments are not made. If you have little to no business collateral, there’s always the option to use personal assets, but some business owners are unwilling to do this.
Banks lend depending on the value of your assets. Lenders want to know that even if you default on the loan, no money will be lost on their end.
Collateral isn’t easy to come by. It takes business growth and asset acquisition, both of which cost money. Aside from coming up with collateral, the next step is to go with a non-traditional lender. Online lenders usually offer higher interests rate in the absence of collateral.
Too Much Debt
Having high business debt while seeking a loan don’t mix. If your business is already buried in debt from existing loans and lines of credit, a new lender may be unwilling to extend additional credit.
Pay down your loans! Having a good financial standing is a must if you want to get approved for business loans in the future. If you’re unable to pay off your debts as quickly as you need to, try negotiating with the lender. Some will lower your interest rate which means more money goes towards the funds you borrowed.
Too New of a Business
In the age of Shark Tank and Kickstarter, some business owners have the false idea that their business can easily receive funding from investors. But, the reality is that lenders want a track record of consistent revenue and market experience before they dish out their own money. For startups, sometimes time can be the biggest challenge. Sadly, we can’t push the clocks forward.
A huge benefit of being a startup is that you have access to alternative sources of capital. Small business loans, online lenders, grants, crowd-funding, and angel investors are all ways to get access to the cash flow that you need.
Getting denied for a business loan can be a setback, but it’s not the end of the world. Figure out what likely caused your loan to be denied and work towards a fix. Have you ever been denied for a business loan? What steps will you take in the future to better your chances of being approved? Leave us a comment in the section below.