You applied for a business loan, it was denied, but why?
Every small business at some point or another needs working capital. Whether you had applied at a bank, credit union, alternative finance lender, or even with your payment processor, there is always a chance you will not be approved. Typically, you either get a simple decline letter, a phone call, or worse yet, you get no reply whatsoever. We hear about it, understand it, and want to provide some actual insight into some of the granular reasons for a business loan being denied.
Top 10 reasons a business loan is denied
- Credit score
- Time in business
- Beat up bank statements
- Inconsistent cash flow/deposits
- Payment history
- Application mistakes
- Using a broker with poor experience/relationships
- Applying too many times at once
- Applying for programs that are not a fit
Let’s jump right in to each reason a business loan gets denied.
1. Credit Score
There is a misconception that floats around the business financing world that being a business loan, your personal credit is not important. This is false. While it is not fully based on it, with other factors being considered, a lender will feel far less comfortable extending financing to someone with a 550 score vs a 700. To see the best success, it is best to bring a 650+ credit score to the table, this will ensure you will not be denied a business loan over credit, and typically result in more favorable payback terms. There are options for folks with less than stellar credit, but it is important to know who to even apply with, which we will cover more in depth. Our advice: Address credit issues such as late payments, medical bills, or other negative marks prior to attempting to obtain financing.
2. Time in Business
This is a common reason a business loan gets denied, and one that you do not have a ton of control over. Traditional banks and lending programs most times will require two years in business, and the further north of that you get, the better chances you have. When it comes to alternative funding sources, there are benchmarks. 6 months, 1 year, and 2 years. At 6 months, options open, granted they are very short term. At the 1 year mark, more doors open, and some better options become available, and at 2 years there is a lot more access. Our advice: When in the under 2 year area, it is best to try and work with an alternative funding source, that can help get you in position to get the best programs available. The other option, is just to be patient, grow your business, and apply at the right time for a traditional loan.
3. Beat up bank statements
A set of business bank statements gives a lender the opportunity to see exactly how your recent cash flow is looking, and make determinations on your ability to repay. Most programs available to businesses will ask for 3-6 months worth of statements, along with your application. There are a few things that are considered. Number of deposits (it is best to have 5 or more), number of negative days (best to be as close to zero as possible), NSF items (again, best to be closer to zero), and average daily balances (best to carry roughly 10% of your average deposit amount). An extremely common reason for a business loan being denied is something in here missing the mark. For traditional style loans from a bank, your financials are the critical piece, along with tax returns. Our advice: Lenders love to look heavily at the last 3 months, if you are in a rough patch and can wait it out, do that. You will ultimately see a higher chance at success, and receive better payback terms if your bank statements are in good condition. If you can not wait, make sure to apply for the right program.
4. Inconsistent Cash Flow
In addition to point #3, consistency is a favorable thing to have on your side. Huge swings in revenues can have a negative impact on the business loan application process. We see a lot of applicants who will for example, deposit $27,000 one month, $13,000 another, and 93k in a 3 month picture. While that large month in this example is a good thing, it also shows the underwriter that your cash flow is very volatile. This one is not usually something you can control, all business models are different, and some just have this type of cash flow. Our advice: When you apply, even if asked for 3 or 6 months of statements, offer up 12, and include your financials. This will ensure the lender gets a much better understanding of your business, and increase your chance at approval.
Unfortunately, not all industries are as favorable as others when it comes to applying for a business loan. Industries are broken down into risk, and if you are a high risk bracket, it is harder to get funding. Examples are boom or bust industries such as mining, oil, logging, etc. These industries can get approved, but you have to leverage the right relationship to understand your best chances. Industries like trucking, some construction trades, real estate etc also can face some small roadblocks. Success comes down to knowing where you should apply, and is another reason it pays dividends to work with an expert. Our go to program is a monthly payment term loan, that has no industry restrictions. Our advice: If you were declined because of your industry, your best bet is to reach out to us directly. Our experience and relationships can most likely get you funded. Keep your credit high, bank statements good etc, positive factors tend to help offset detractors.
6. Payment History
This is a tough one, and one we see from time to time around here with our team. Prior defaults on a business loan, even on a merchant cash advance, always will come back to haunt you. The alternative lending industry utilizes a centralized system, where they report unpaid funding contracts, and basically makes it impossible to get respectable funding. There is not a whole lot you can do here, but make good on any old balances, and work towards a better position. This includes judgements and liens, also a quick roadblock to getting approved. Our advice: Pay off any old business loans, merchant cash advances, etc. There are ways to get back into approvals for funding as time goes on, but without a full repayment, chances are basically zero. Avoid cash advance companies that say they fund anyways, the terms will send you straight into a worse scenario.
7. Application Mistakes
This is the most preventable of all reasons a business loan is denied. You must take your time, and be accurate. Simply entering wrong gross revenue amount, inaccurate ownership breakdown (leaving off an owner and putting yourself as 100%), or other minor mistakes can kick an application out as declined. We always advise folks, just take your time, if you are not sure of an answer, make sure to check and get it, and keep things accurate. It also can really help to use a professional email. You must remember, a lender is quickly making assumptions based on your application info, use of funds, credit profile, and bank statements. You are not there to sell them on why they should approve you, so it’s important to paint a fully accurate, easy to follow picture. Our advice: Take your time, a professional advisor will have no problem walking you through the application process, and answering any questions you may have. Just slow down.
8. Using a broker with poor experience/relationships
Let’s face it, like any industry, the people within it are not all built the same. The clear cut, number one reason you want to work with a broker, is their experience, and knowledge of where your best opportunity lies. A legitimate broker does not charge fees, and costs the same commission as if you call right to the source, who will be biased to their program. Sometimes we see a business saying their business loan was denied, only to find out they applied for a completely wrong program. Our advice: Considering working with someone? Check them out in great detail, reviews, Google searches, etc. If you feel off, just avoid them. This will save you the hassle of being denied for a program you should not have applied for, and keep you on a positive track. Our advice: I suggest reaching out to us
9. Applying too many times at once
The smartest consumers shop for the best deal, you should never look at one option and assume it is the best. If you would not do it with a house or a car, you should not with a business loan either. However, there is a fine line. What most businesses do not realize, is there are maybe 300 places to get funding, and 50,000 brokers. When you apply with 10 different companies in a week, your business loan application will be sent to the lenders that many times. This can really sound the alarm bells, you never, ever want an underwriter thinking your business is desperate for funding. I have seen business loan applications get denied simply for being received too many times in a short period. Our advice: Stick to a couple of reputable sources, if a company has a positive influence online, and treating you well, there is a great chance you will be taken well care of.
10. Lastly, applying for programs that are not a fit
This is really a tie in with number 8 on our list here. Business lending is a very confusing industry, and if you have no experience in it, you will be applying blindly at programs. All business loan programs are broken into tiers, and a professional knows who likes what type of applicant. A lot of times we talk to someone who maybe did not get declined, but got APPROVED for a deal, and got totally out of line terms. Example, a business owner with strong time in business, strong credit, and great financials gets approved for a program that is geared towards less qualified businesses. Or, you are applying for loans that require 2 years in business, and you have been open 14 months. Either way, if the application is to the wrong programs, you could see a business loan being denied, only because of the choice on who to work with. Our advice: Work with a seasoned professional who can help ensure you apply for the right programs, and get APPROVED. Learn about all our types of funding to see where to sit.
As you can see, there is actually a lot behind your business loan application being denied. The key is just working to identify why you were declined, take the appropriate steps to remedy, and try again. It really, truly pays to work with someone who has the experience, they cost no more, and can help put you on the right track. We hope this is helpful, our goal is to share our experiences and knowledge, to help one business owner at a time. We are always around if you want to chat, and we are pretty cool people too.
Here are the BEST tips to succeed with a business loan
- Be complete
- Apply at the right time
- Use the right sources
- Call Strong Capital Funding