You applied for a loan for your small business, and the bank declined your application.
What happened, and what can you do about it? First, you must find out why the loan was denied.
Legally, the bank must notify you that the loan was not approved, and explain why
It is possible that this explanation is not very detailed, therefore, if you have questions or feel that you met the requirements, you may wish to follow up with the lender to obtain more information.
In general, however, there are some very common reasons why your bank loan application would have been rejected.
- These include: Low credit score or no credit
This is a very typical reason for loan applications to be rejected.
If you own a smaller company, the bank usually seeks to examine the personal credit score of the CEO, or that of one of the owners of the company.
If your personal credit indicates that you have excessive obligations, or if you do not have a high score, it is very likely that your loan will be rejected. A bank can also examine your commercial credit score (which is between 1-100, with 75 being a good score). Some small business owners are unaware that their company has its own credit score. Check your score, and if it is low, start working to repair it.
Many small businesses rely on their personal credit to start their business and thus they are governed during the first or second year, so it is not unusual to have a high debt. Or you may have had credit problems due to health problems or other personal issues. Suppose that it will take at least a year to repair your credit, so you can choose to seek a loan with us, which specializes in helping small businesses obtain access to working capital
- Risky Business
Banks tend not to lend money to small businesses that work in industries that are considered high risk – or the industry is volatile, such as restaurants that tend to open and close quickly. Other industries, such as adult dating services, nutritional supplements and travel, can also be considered risky, since they have a higher percentage of cancellations / products returned. If you had difficulty obtaining a merchant bank account, you are likely to have difficulty obtaining a traditional bank loan.
- New Companies
Traditional bank loans are rarely approved if your business was opened less than a year ago
It takes time to establish credit and convince lenders that your company has a good chance of surviving. The good news is that there are sources of financing that only require 3 months of operation as a company, to be able to request working capital. Check qualification requirements before applying for funding, and look for options with less time demands on the business – also check the monthly income requirements.
- You do not have enough debts.
What do you say? What can your loan be rejected because you are not in debt? It sounds weird, but it’s true. If you do not have a history of obtaining and using credit, banks feel they have no way of evaluating how you will manage a loan. Lenders like to see that you use no more than 60-70% of the available credit, and that you make payments on time. For a small company that would mean personal credit cards and lines of credit. If you do not use the credit, or if you need to rebuild your credit score, you may want to start by getting a secured credit card and using it appropriately. Do not charge it to the fullest, and try to pay on time.
- You have no guarantee
Traditional lenders will want small business owners to commit to a guarantee, which will be used to repay the loan if they do not meet the payment deadlines. The guarantee may include funds in a personal bank account, equipment or property. If you do not have sufficient collateral, or guarantee that the bank will accept, your loan application is likely to be denied. Look for financiers who do not require guarantees, but who offer working capital that depends on the income of your company.
- Your company experiences seasonal depressions
Banks tend to prefer lending money to companies that have a predictable cash flow, and may consider seasonal variations as problematic. Other funders will understand that your company falls a bit during particular seasons and recovers a strong cash flow at other times of the year.
Financing options, such as cash advances for merchants, can meet your needs and help you pay for the funds in a way that suits your cash flow.
- You did not ask for enough
You may feel that asking for less improves your chances of being approved for a commercial loan. But banks generally do not want to deal with the hassle of lending small amounts of money. It takes approximately the same amount of time to pay a large loan as for a smaller one, and larger loans are more profitable. You may consider increasing the amount requested or working with lenders offering smaller loans.
- You do not have the correct documentation
Banks usually request a detailed business plan, their financial projections for the loan term, the last three to five years of their personal and business tax returns, six months or more of their company’s bank statements (and, probably, your personal account statements), your personal and business credit scores, and business documents such as contacts, partnership agreements, permits, leases, mortgages and other obligations. They often request additional backup information during the approval process. Calculate a total of 30 hours to spend collecting the information.
It can be a real burden for the owner of a small company, which usually works 24 hours a day to keep the company running. If you do not have the time to devote to obtaining a bank loan, look for alternative sources of financing with shorter approval times and more limited documentation requirements.
What to do when your bank loan is denied?
You have two options, either to fix the reason for the denial: build your credit score, wait until you are in business for a year, get and use the credit carefully, etc. – or you can choose to work with a funding source whose requirements better meet the needs of smaller companies.
We work to help owners of small and medium enterprises to obtain the working capital they need to grow.