Most businesses count on loans to help with their small business’s needs. Not only can the process seem overwhelming or nerve wracking, there might be fear that you may not get approved for what you are looking for. Lenders deny hundreds of people getting approved every day and it can be really disappointing to get denied as a business owner. It is nothing to worry about or be ashamed of. What does matter is that you should start to look into the reasons your application was denied so you can then avoid them next time you apply. In this article, we will discuss some of the reasons why your loan application was denied and the following steps to take afterwards.
Reasons Why Lenders Denied Your Loan Application
There are errors on your application
One of the biggest factors to loans being rejected are that the applicant did not properly fill out the application. This includes leaving sections of the application blank or unfinished, entering incorrect information, or failing to provide all the required documents. It is important to have all your documents prepared ahead of time and ensure you are taking the time to fill out your application so you do not make any mistakes.
You have a poor credit score
Lenders look at your borrowing history when you apply for a loan and prefer to see a solid history and that you have repaid loans. They have their own set of minimum credit score requirements that you need to look into to see if you will be able to qualify. However, if they see that you have not borrowed much or that you have defaulted on loans in the past, this could be a reason why your application will be denied.
You lack collateral
Many small business loans are secured loans, which means you need to provide collateral in case you are not able to make the necessary payments on time. There are various assets you can use as collateral such as vehicles, equipment, homes and more. If you are lacking collateral, lenders are more likely to decline your application because they do not feel comfortable taking that risk.
You have a lack of cash flow
Cash flow is another factor lenders consider before they approve your loan to make sure you can afford to make the minimum monthly loan payments. If a lender thinks you cannot afford to repay the loan whether you because you lack cash flow or they cannot verify your income with your information, they are more likely to deny your application.
You are in a risky industry
If a lender views your industry as risky, they may deny your loan application. Some of these industries include restaurant, construction, and farming. There are still financing options out there if your business falls into this category so not all hope is lost.
Your business plan is not impressive
Most lenders require the applicant to come with a detailed business plan. This plan is used for them to see how you intend to spend the loan, think of it as a sales pitch. If it is done right, you will impress the lender and they will be more likely to give you the financing you need.
If you have been denied, the lender is required to give you an explanation of the source of information that was used such as your credit report and reasons for denial.
So you have been rejected from a loan, what is next? You can use this as an opportunity to build your credit and increase your cash flow so that the next time you apply you will get approved.
Consider taking the following steps:
- Build your credit – make timely payments and keep credit balances low. Building credit takes some time so try to build it in order to save on monthly payments and get a low interest rate.
- Check your credit report for errors – check your credit report to see if there are any mistakes on it and get them fixed as soon as possible.
- Pay off debt – trim expenses where possible, pay off debt, and avoid taking on new debt before applying again.
- Compare lenders – choose lenders that cater to you by comparing all the possibilities in advance.
- Get prepped – be sure to have all the required documents ready to go. This includes financial statements (personal and business), your business plan, and any other documentation the lender requires.
Being rejected is not a good feeling but fortunately there are ways to improve your chances the next time you apply. After you have been denied, wait some time to reapply. If you have too many hard inquires on your credit report, it can drop your score. Take the time to improve your score, reduce your debt, and save for a down payment so you are ready for the next time you apply.