Did the bank recently reject your loan application?
Then this will be the best article you’ve come across today.
In this article, you’ll learn the factors that keep you from getting a business loan.
I always tell my readers and viewers that getting a business loan is one of the best ways to expand or grow your business.
However, only some businesses meet the requirements and get loan approval.
As stated in the 2023 Report on Employer Firms, only about 53% of small business loans applied by an employer-based business in 2022 were approved, 26% were partially approved, and unfortunately, the other 21% were denied.
Fortunately, with over two decades of experience as a financial coach and banking expert, I’ll guide you on your finance journey to help you achieve your financial goals and your company’s growth.
In my opinion, business loans can be the holy grail, especially if you want to launch or scale your startup or small business quickly.
And if you’ve recently been denied, here are the factors that keep you from getting that loan!
8 Factors That Keep You From Getting A Business Loan
If you plan to take out a business loan now or in the near future, it’s in your best interest to learn about some possible roadblocks to loan approval.
But don’t worry!
Nowadays, various lenders cater to startups for small business owners like you!
Some lenders offer business loans even to business owners with bad credit histories.
Regardless, here are eight factors that can keep you from getting a small business loan:
1. Poor credit history
One of the most common reasons many business owners need help to get that sweet loan approval is their poor credit history.
Every lender is unique and has its own loan requirements that business owners must follow.
Once you’ve submitted your application, lenders will evaluate your personal and business credit to check your creditworthiness.
However, business owners with poor credit will have difficulty qualifying for business loans, especially from traditional banks, since bad credit is classified as a risk for lenders.
Usually, lenders like their clients to have a fair to good personal credit score or higher to qualify.
But what’s a bad credit score?
Credit scores are usually computed using a model which gives scores on a scale of 300 to 850.
Here’s a quick guide on credit score ranges and what they usually mean:
- Poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very good: 740-799
- Exceptional: 800-850
Fortunately, many alternative financing options exist for small businesses, such as crowdfunding, business grants, online lenders, and more.
2. Limited cash flow
Cash flow measures the amount of cash that comes in and out of your business.
It is one of the first things lenders will review when looking at your business’s financial status.
Positive cash flow indicates that your business is able to repay debts and meet other expenses.
The lack of cash flow can indicate to lenders that there are risks, such as delayed loan payments.
If your finances show that you can easily or realistically repay debts, you’ll have a much higher chance of being approved for the loan.
3. Having a Weak Business Plan
Having a strong business plan is attractive to lenders. It gives you a better chance of getting that loan approval.
Even though not all lenders require you to submit a business plan, some, especially traditional banks, still need them as part of your loan application.
A business plan formally explains all your business goals and how you plan to achieve them.
Lenders will want to know where their money will go and whether it will be put to good use.
They will evaluate your growth strategies and analyze if your business will be profitable.
Ensure you tackle why your business wants and needs the loan, how you will use it, and how you plan to repay it.
Other important information includes:
- Executive Summary
- Mission Statement
- Vision
- Market Research
- Promotion Plan
- Profitability projections
- Business financials
4. Multiple Loan Applications
You might think sending out multiple business loan applications with different lenders is a good idea, but it’s not.
Unfortunately, too many applications can be bad for you.
Applying for multiple loan applications harms your credit score.
When applying for a line of credit or loan, lenders will review your credit, called a hard inquiry.
A hard inquiry will temporarily lower your credit score but will bounce back through time and positive reports.
Applying for multiple forms will portray you as a credit-hungry consumer.
5. Industry Risk
Some lenders will not lend to businesses that operate in certain industries.
For instance, restaurants have very high failure rates.
Some lenders consider industries like real estate, sales, gambling, dispensaries, and cryptocurrency a high risk.
Try finding lenders specializing in your business’s field to avoid rejection of this loan.
6. Too much debt
Outstanding debt can cause lenders to be unwilling to approve your loan.
This usually happens for business owners who have significantly large amounts of debt.
Lenders mainly want to see whether or not you’ll be able to repay the loan.
And if your business revenue is busy paying other loans, you won’t have enough cash to repay the new loan.
7. No business collateral
Lenders also consider business owners who don’t offer collateral as a risk.
Collateral is an item pledged as a safety net or added security to help secure a loan.
Loans requiring collateral are secured loans with lower interest rates than unsecured ones.
Collateral can be helpful for business owners that have limited credit history or bad credit.
On the other hand, loans without collateral or unsecured loans can be an alternative option. However, these loans usually have higher interest rates and stricter terms.
8. Incomplete or Missing Financial & Legal Documents
Lenders will require you to submit many financial and legal documents when applying for a business loan.
Evaluating these documents can help them further assess your business and decide whether or not to approve your application.
A few records that you have to prepare are the following:
- Tax returns
- Financial Statements
- Collateral
- Personal and business bank statements
- Loan history
- Government-issued ID
- Proof of ownership
- Business licenses and Registrations
- Franchise agreements.
If you’re missing any key documents, you’ll unlikely get approved for a loan.
Take the time to organize all your documents. Ensure that everything is ready to go and there are no missing pieces of crucial information or errors.
Alternatives To Small Business Loans
If you’re struggling to secure a business loan, consider the alternatives below.
Alternative lenders can help you acquire financing outside traditional bank loans to help grow your company or gain capital.
These alternative financing options below can help you discover your business’s best and most suitable funding.
Crowdfunding
Crowdfunding is an alternative way to raise money.
It is a popular method for getting paid instantly, pre-selling products, or producing more products for your customers.
Crowdfunding websites like Kickstarter help business owners gather donations from donors.
However, crowdfunding will take a long time. If you want to get funds quickly, try other alternative funding options.
Business credit cards
Many business owners opt for business credit cards as a loan alternative because they make it easier to finance small, everyday purchases for a short time.
Credit cards also have various perks, such as fraud protection and rewards.
Many credit cards also offer cash back that can help with saving money.
Some business credit cards also offer travel benefits if your business requires you to travel often.
Online Lenders
Bluevine and OnDeck are well-known online lenders offering various loans with flexible qualification requirements.
Many entrepreneurs opt for online lenders since they are easier to qualify for than traditional banks and popular lending agencies.
Their application process is easy and can be completed online in just a few minutes.
Business Grants
Grants are a source of funds issued by the government (federal, state, or local), a company, or a philanthropist that you don’t have to pay back.
However, applying for a business grant is a very competitive process and has very specific eligibility requirements.
Factors That Keep You From Getting A Business Loan: Final Thoughts
Applying for business loans can be your stepping stone in helping your company grow.
However, you must first meet and qualify for various lending requirements.
There are many reasons why business owners fail to get that loan approval.
Poor credit and limited cash flow are some key factors that prevent people from getting business loans.
Other factors include having too much debt, no business collateral, or missing financial and legal documents.
If your company is still disqualified from getting a loan, you might want to consider alternative financing options such as crowdfunding or applying for business grants to get the funds that you need.