Getting approved for a business loan includes many things. Your average monthly gross sales figure, SSN of the business owner, 3 months of bank statements, and more! Sometimes, your applications may get rejected without knowing what went wrong, which can be frustrating and confusing. Don’t worry; we have made a quick guide to help you understand the reasons for loan rejections, alternative options to opt for, and things you can do when your loan applications get rejected. We’ll also provide you with a to-do list you can do to improve your chances of getting approved for the loan next time!
Why is my business loan application rejected?
There can be numerous reasons for a business loan rejection, some of which are mentioned below:
Poor Credit History
Your lender will check on the insights of your payment history to know how responsible you are with finances. Missing your payments will lower your FICO score, leaving a negative remark on the business lender. They will look at your personal and business credit score while deciding on your loan application. You need at least a 680 FICO score to qualify for the business loan. The lender will reject your application if your credit score is damaged due to late payments.
Incomplete Application Form:
When you are in a rush to get a loan, chances are you may leave out some of the information on the application form and submit it without double-checking. A loan application is important to document the borrower’s details when lending the money, and if the borrower has submitted an incomplete form, their application will be rejected without review.
Incorrect Details in Application:
Banks want to ensure that the borrower is reliable and can take responsibility for the money they provide. If they submit incorrect information, banks may consider him/her an irresponsible borrower who cannot handle the loan money and will reject their application easily.
In addition, writing off incorrect information on the loan application may lead to legal consequences, as it is considered illegal to provide incorrect details on a loan application.
Insufficient Time in Business
Your business should be in a running position from the last six months to one year to meet the business loan requirements. Make sure to pass at least one year before applying for a business loan, or you may face rejection. Apart from this, your application can still be rejected if your business doesn’t have proper financial records but meets the minimum time-in-business requirements.
Not enough Collateral
Business Lenders want to ensure they get back the money they have to lend. For this, many lenders also eliminate their risk by asking borrowers to provide business assets as collateral against the loan. In the same condition, the lender can choose to seize that asset to acquire the outstanding loan amount from the borrower. If you fail to provide collateral, your loan application may get rejected.
It can be difficult to obtain a business loan if you’re in a risky industry, as lenders don’t tend to raise funds for such businesses. Some examples of such businesses include a restaurant, agriculture, construction, etc. The revenue generated from these businesses can be unstable, and the failure rate is usually high. Lending out money to these businesses can be risky for the lender.
When you apply for a business loan, the lenders look out for your business cash flow and stability to give a loan. A stable business means stable cash flow and that you can pay off the loan without hassle. The lender may not want to approve a loan if you face instability in your business.
While taking out a loan, the lender pulls out your credit history and existing loan history to understand the situation prior. If you have an existing loan under your name, the lender may consider whether you can handle another loan. Furthermore, if you have missed a deadline on previous loans or had issues repaying the loan on time, the lender may reject your application completely.
Having bankruptcy under your name is not a good sign for your business; it indicates insufficient cash flow and can be one of the reasons for loan application rejections. Business Lenders may view your bankruptcy file as a bad sign and shut you down on the first go.
If you have filed for bankruptcy, you should immediately focus on ways to improve your credit profile while you wait for the bankruptcy to be removed from your reports. Consider obtaining a secured credit card, becoming a member of a credit union, or finding a co-signer to get your credit back on track and increase your chances of being approved for a small business loan.
Steps to follow if your Lender Rejects your Business Loan Application
- Understand the reason behind your loan rejection.
- If it’s something small, try to rectify it.
- If it’s something you don’t understand, seek professional advice to learn from your mistakes and take measures to solve the problem.
- Take all actions to correct the errors and apply for the loan again.
We also advise you to look at your credit report and denial notice to know details about your documents.
Additionally, you can take a few steps to improve your chances of getting approved for the loan. Refer to the points mentioned below:
In some cases, the lender may require you to provide collateral against the loan, as this shows that you are a reliable business owner who can be trusted with the loan and that you’ll be able to pay back the loan without fail. Sometimes, you may get better loan terms when you provide collateral as security.
Check For Your Credit Report
One should always have an idea about your credit history before applying for a loan. Even if you failed to do so, it’s best to check your credit report once your lender turns you down. Get a view of your payment history, credit accounts, any issues that can be rectified, or any other details pulling down your credit score. Once you cross-check each point and have rectified them with proper care, you don’t need to worry about this one particular thing while filling in future applications.
Cross-Check Your Decline Notice
Your decline notice will state the exact reasons for the loan denial. Considering this information, you can improve the issues and increase your chances of loan approval.
Prequalify With Other Lenders
Before submitting the application form to the lender, you can pre-qualify the details with another lender and know your chances of approval. They may also state any issues that can be the reason for loan rejection. Hence, you can rectify each issue even before going to the actual lender.
This step will help you understand the problems if any, and work on them, so you don’t have to face rejection on the very first time of loan application.
What happens to my credit score if my application is rejected?
When your loan application is rejected, your credit score is not impacted directly; meanwhile, if, at the time of the application process, your lender had performed a hard inquiry on pulling out your credit history, it’ll temporarily hamper your credit, causing a slight dip in your score.
In such situations, you don’t need to worry a lot as you can continue to pay back your loans on time and improve your credit over time. You need to be consistent with the repayments; the loan denial won’t make much of a difference in your credit score in the long run.
When to apply for a loan after being rejected?
Steps to follow before applying for a loan the second time:
- Wait for at least six months before applying. In the meantime, improve your credit score.
- Don’t apply for loans in shorter durations, as lenders may see you as desperate to get money. Moreover, you will not get qualified, which will hamper your chances of getting loan approvals in the future.
What will happen if my loan application is rejected the second time?
- Consult the lender to get a detailed explanation of the rejection.
- Understand the issues and know ways to rectify them.
- Check your credit score again.
- Work on the issues with utter care.
Steps To Get Approval For A Business Loan
Work on your Credit Score
As we all know, how important it is to maintain a good credit score to get a loan hassle-free.
You need to boost your credit score by making timely payments of your bills, as it’ll improve your payment history and overall credit report.
Track your Debt-to-Income Ratio to Maintain Balance
You can reduce your debt by paying down existing debts or requesting an increase in your credit limit from a lender. As your debt directly relates to your available credit, it’s best to improve your debt-to-income ratio.
Make On-Time Payments
On-time payments are crucial to maintaining your credit score and getting loan approval. Lenders don’t consider those borrowers who are inconsistent in making timely payments as they consider them irresponsible. Even if you’re busy, maintain a habit of making on-time payments for building and maintaining your credit report.
Get A Business Loan Approval You Need
Business Advance Funding aims to provide fast access to cash funding for businesses. We believe in giving loans based on your business’s performance in the marketplace and not your credit score. It doesn’t matter if your business is small or big; we provide business loans even if your application is rejected elsewhere. You can get a loan from us without worrying about another rejection.