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Updated: May 7, 2020
Applying for business financing can be a scary process. How do you know if you’re seeking the right financing? What if you botch the business loan application? What if they reject you? All valid concerns, but none of these worries should keep you from chasing the debt financing your company needs.
Only about 37% of small businesses apply for financing, and of those who do apply, banks reject around 80%. What’s more concerning than that rejection rate is the number of businesses that don’t ever apply—close to 20% of companies refuse to request bank credit because they’re “discouraged” by the process.
In reality, there’s a good chance your small business loan application will get rejected—and that’s OK! Rejection is all part of the entrepreneurial game. But it really doesn’t matter how many lenders say “no” when all you need is a single “yes.”
Still, rejection can sting, and it’s healing and empowering to get the closure you need. That’s why it’s crucial you learn why lenders are rejecting your loan application so you can make revisions and improvements to your future requests. To give you the confidence to pursue future financing relationships, explore the 6 most common reasons lenders deny funding below.
Remember that fear about botching the small business loan application? That’s a reasonable concern because most small business owners spend hours completing traditional forms (hint: applications via online lenders can take less than 10 minutes). It can feel like a slap in the face to have all that work seemingly wasted.
However, the rejection is sometimes on the applicants—they fail to provide all the necessary information and requested documentation. Ultimately, lenders use all the provided information to gauge your business’s financial ability to pay back the loan. If you can’t even get the application right, lenders doubt whether they can trust you to pay back tens or hundreds of thousands of dollars.
Take your time when applying to make sure you include all the required financial documents with your business loan application. A few extra minutes now could save you hours, days, or even weeks in securing the capital your business needs.
It’s not your fault if your business is young, but you can’t blame lenders for being a tad skeptical. Lenders want to look at your cash flow and business history to get a good idea of your future financial capabilities. If you lack the experience and years in business for them to set realistic expectations, they’ll lack the confidence to loan you capital.
Don’t take it personally—lenders just have guidelines they like to follow when assessing applicants. Different loans have different qualifications. For example, you typically need to be in business for only 6 months to qualify for a business line of credit—but you’ll need at least 12 months of history to be eligible for equipment financing.
If you’re young and hungry for cash, don’t panic! Your business can qualify for plenty of alternative loans that don’t eat your company’s equity or demand outrageous interest rates.
For lenders to decide your business is worth the risk, they may require a guarantee to seal the deal. And it makes sense—they need to make sure their investment is protected if you fail to make the necessary payments. That’s why inadequate or nonexistent collateral can be an application dealbreaker.
Vehicles, homes, property, equipment, and more can all be used as collateral. It’s up to you to decide what you’re willing to risk—just know that if a lender requires collateral, your small business loan application won’t stand much of a chance if you don’t include it.
Many lenders will ask to see your business plan as part of the application process. They want to know how you plan on using the loan and will determine if your strategies are realistic. Remember, your plan needs to convince them that you will make the money you need to repay the loan. It’s essentially a sales pitch.
If your plan screams mediocrity or is underwhelming, lenders may lack confidence in your business. Take the time to create a well-thought-out business plan. Not only will it reduce the chances your small business loan application gets rejected, but it’ll also serve as a guide later for how you’ll spend your new-found capital.
A credit score is a number that lenders use to determine a consumer’s creditworthiness—the higher the number, the more lenders can trust you. Many lenders and loans have a minimum credit score you’ll need to qualify, and they usually share these expectations publicly. Also, keep in mind that some lenders will look at your business credit and your personal credit—both scores tell stories that lenders are interested in hearing.
Don’t stress too much—you don’t need a perfect score to secure top-notch financing. Yes, lenders take the number seriously (and you should, too), but it’s not always a make-or-break factor. If your score is teetering on the line, you may still qualify, but it’s certainly more difficult.
Some lenders will reject small business loan applications based on the nature of your industry. For example, if you’re operating in the gambling, alcohol, or trucking industries, lenders might be more likely to deny you funding. They’re worried your company is more likely to fail. And if it fails, that means they don’t get their money back—and that’s bad for business.
So does that mean if you operate in a high-risk industry that you can’t get funding? No, not necessarily. You might not be able to get a traditional bank loan, but you still have plenty of other great business loan options.
If your loan application is denied, the lender must give you the reason(s) your application was rejected. According to the FTC, “The creditor must tell you the specific reason for the rejection or that you are entitled to learn the reason if you ask within 60 days.” This gives you the perfect opportunity to learn from the experience, polish up your next application, and keep chasing that capital.
If your business loan application gets rejected, don’t give up! There are business financing options available—you just need to go out and find them. Try, try again.
Jesse Sumrak is a Content Marketer at Twilio SendGrid focused on writing killer content. He's created and managed content for startups, growth-stage companies, small businesses and publicly-traded businesses. Jesse has spent almost a decade writing about small business and entrepreneurship topics, having built and sold his own post-apocalyptic fitness bootstrapped startup. Jesse studied Public Relations at Brigham Young University.