As the saying goes, money can’t buy you happiness, but it is essential for getting a business off the ground and keeping it running.
If they can’t raise the funds themselves, some business owners rely on loans and other forms of financing to keep things ticking over and moving in the right direction.
That’s why, if a business loan application is denied, it can cause feelings of panic and frustration. We go over some of the most common reasons for business loan applications to be refused, and what your options might be if this happens to you.
Why has my business loan application been refused?
Some of the most common reasons that business loans are rejected include:
- Poor (low) credit score: Your credit score demonstrates how creditworthy you are to a lender. If your credit score is low or you have damaged credit, this will be off-putting to a lender who wants to be as sure as possible that they can recoup their money.
- A high debt-to-income ratio: If you are in a great deal of debt or owe significantly more than you are earning, this will often be a major red flag for lenders
- Cash flow limitations: Some lenders will require a specific threshold of annual revenue to mitigate risk for themselves
- Insufficient collateral: Some lenders will require a minimum value in business assets which, if needed, they can then use to try and recoup what you borrow
- Insufficient time in business: Some lenders will stipulate minimum time-in-business requirements. These can be anywhere from six months to over a year.
- High-risk industry: There are some industries and sectors that lenders deem to be high-risk. These include agriculture, construction, and gambling, amongst others. If you are operating in a high-risk industry, securing business loans can be tougher.
- An incomplete application: Some applications are turned down because the form is incorrect or doesn’t provide all of the necessary details or documentation. You might need to make sure your business plan is realistic, too!
What to do if a business loan application is refused
If you’ve applied for a business loan and it has been rejected, it’s perfectly normal to feel disheartened and even a little stressed out. It’s okay to feel this way when things haven’t gone to plan, especially where your business and finances are concerned.
It’s not to say that future applications you submit will be rejected too, but you might need to take action now so you’re in a better position for the future.
Get to the bottom of the rejection
First and foremost, reach out to the lender who rejected your application to find out why you have been refused. Lenders are normally required to provide justification for rejecting an application, and this information will be super useful to you.
Once you have a better idea of why you were refused a loan by a lender, you can use this to make necessary changes and improve your chances in the future.
Put measures in place to boost your credit score
If it’s your credit score hindering your ability to secure a business loan, this is something you’ll need to address. In fact, maintaining a healthy credit status is important whether you’re actively seeking funding or not, so don’t wait until it becomes a problem to do something about it.
The most effective ways to improve your business credit score include:
- Making sure your personal credit score is good
- Settling existing debts and settling all outstanding payments
- Ensuring you always pay your bills on time
You could also review your credit report on a regular basis so you can identify and rectify any errors promptly.
Assess your overall financial situation
After addressing your credit status, it’s time to put your general finances under the spotlight to see where improvements can be made to remove things like cash flow limitations or debts.
Working with a financial advisor, accountant, or consultant might be useful too, helping to identify areas which need attention.
Finding other sources of funding
Traditional banks aren’t your only port of call where lending is concerned, and you might also look into a range of funding options:
- Peer-to-peer lending platforms
- Online lenders
- Credit unions
- Community development financial institutions (CDFIs)
- Business incubators
- Crowdfunding
- Grants
- Angel investment
- Venture capital
These types of lenders will most probably have different (more flexible) criteria and be more willing to work with businesses that don’t necessarily tick all the boxes traditional banks require.
One of the biggest benefits of non-traditional forms of funding is that they are typically far more flexible than traditional means. This often includes faster and more lenient approval processes and repayment terms.
That said, interest rates are sometimes higher when it comes to alternative funding, so there are pros and cons to weigh up.
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