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Why was my business loan application rejected?

Columnist Dean Swanson says avoid the pitfalls of the four top reasons loans are denied.

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For business owners, it’s a terrifying situation: You were counting on getting that business loan, but the bank rejected your application.

In the last few months, there have been several small business CEOs that have struggled with the issue of not getting their business loan application approved and requested help.

Sharita Humphrey is an award-winning finance expert and money mentor. She recently addressed this issue as one of SCORE’s content partners. I share this to help CEOs evaluate their next step after being turned down for a loan.

There are several reasons why business loan financing applications get rejected. Here is a list of top four reasons your business loan might be denied. If you’re planning to apply for a loan in the near future (or if your application already got rejected), you can use this list to avoid facing future application rejections.

1. Poor credit history

Your credit history provides lenders with an insight into your payment history and how you handle your finances in general. If you’ve previously defaulted on loans, have several missed payments, or have maxed out credit card(s), it could lower your FICO score. This, in turn, can affect how lenders perceive you as a potential borrower. Other reasons business loans get rejected include not having enough credit or having little to no credit history.

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Typically, creditworthy borrowers are those who have FICO scores above 670. FICO recommends a few simple ways of improving your score:

  • Pay your bills on time.
  • Regularly check your credit report for errors — and dispute them immediately.
  • Pay down your debts.

2. Incomplete/invalid documents/paperwork

Unfortunately, one of the most common reasons why business financing applications are rejected is due to incomplete or invalid documents and paperwork.

It could be that the applicant didn’t fill out the application correctly or didn’t provide all the necessary supporting documents.

Among the documents required by most lenders are bank statements, tax returns, proof of business registration, business licenses and permits, financial statements, Employer Identification Number (EIN), and your personal and business credit reports. They may also require you to submit other documents related to your business, such as leases, contracts, permits, licenses, and corporate documents.

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To avoid any issues, make sure to get your paperwork in order before submitting your application. Then, make sure to double-check everything. Also, don’t forget to carefully go over each step of your loan application to ensure that you fill it out correctly.

3. Not enough collateral

Most traditional lenders require that you put down sufficient collateral before you can obtain a business loan. If you don’t have enough collateral — or if you don’t put down the right type of collateral — chances are you won’t get approved for business financing. Collateral can come in various shapes, such as an automobile, a house, heavy equipment, etc.

You might be thinking, ‘But I can’t afford to purchase any business equipment without a loan in the first place!’ Unfortunately, this is the reality: chances are you can’t get approved for a loan because you don’t have enough valuable assets. If this is your situation, try to look for an alternative source of financing, such as an unsecured loan.

4. You’re a new business

If you’ve just recently launched your business, you may not have established enough business credit history to be eligible for business financing. Remember: vendors don’t always automatically report your payments to the business credit agencies. So, whenever you set up an account with a new vendor or supplier, make sure that they report your payments. This will help your business build up a good credit history.

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Of course, it’s entirely possible for you to have solid finances and run a successful business even if you haven’t been operating for long. But to get the business financing you need, you may have to look a little harder for the right lender to fit your situation.

Dean Swanson is a volunteer Certified SCORE Mentor and former SCORE chapter chairman, district director and regional vice president for the North West Region.

Related Topics: SMALL BUSINESSASK SCORE
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