Top 5 Reasons Why Small Business Loans Get Denied

There are several reasons why small business loans get denied. Traditional lenders historically have stricter decision factors and lending credit restrictions in place to minimize their risk. The best way to avoid a small business loan rejection is to understand the characteristics lenders frequently view as red flags. Here are five common reasons why small business loans get denied and what you can do to improve your chances of loan approval.

1. Poor Credit History

Your credit profile gives lenders insight into your payment history and how you handle your finances. If you have missed payments, defaulted on loans, or have several maxed-out credit cards, it could lower your FICO score and may negatively affect how lenders view you as a borrower. Creditworthy borrowers are typically those who have FICO scores in the fair to excellent range. FICO recommends a few simple ways of improving your score:

• Paying your bills off in a timely fashion.
• Keeping your credit balances low.
• Opening only as many credit cards as you intend to use.

While alternative lenders are more flexible with their credit score requirements, it’s still important to stay on top of your credit score. A higher credit score makes your business a more attractive applicant because it signals you’re reliable.

This includes both personal credit and business credit, both of which are often considered when applying for a loan. Business credit is based on financial decisions you make as a business owner and serves as a measurement of your likelihood to pay back lenders based on previous payment history. It is connected to your business’s Employer Identification Number. Your personal credit score links to your Social Security Number and calculates your overall creditworthiness as an individual. It’s common for lenders to look at both your business credit score and personal credit score, especially if your business is newly established.

It is recommended you check your credit report annually. You can obtain a free copy of your credit report from each of the three credit reporting bureaus: Experian, TransUnion, and Equifax.

2. Recent Bankruptcy

Bankruptcy is an indication of insufficient cash flow and is one of the top reasons why small business loans get denied. Individuals and businesses need money to pay for the costs of living and operations and declaring bankruptcy is a formal indication that you’re unable to pay outstanding debts.

Lenders view having a bankruptcy on your credit profile as a red flag, but it doesn’t necessarily mean you are shut off from borrowing forever. An alternative lender that offers bad credit business loans could be a solution. 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.

3. Inconsistent Cash Flow

Lenders want to ensure a business has more money coming in than going out before giving the go-ahead on an application. This principle is better known as positive cash flow. Inconsistent cash flow is a top reason why small businesses get denied loans because lenders see it as a risk.

If the financial data presented suggests a negative cash flow or one that’s in a state of flux, lenders may suspect that cash flow history could be a sign of what’s to come. While consistent business cash flow may not always be possible, it’s what lenders prefer. Make sure you demonstrate all of your company’s income streams if you offer more than one service or product. Some industries have seasonal fluctuations and a steady cash flow isn’t common. For such industries, an alternative lender looks at the entirety of a business’s history and credit score to determine approval.

4. Short Time in Business

Lenders frequently make their decisions based on historical financial performance. Therefore, having a newly established company is one of the reasons why small business loans get denied. This reality is part of the reason why it pays to have a high credit score as an individual because it provides lenders with a quantitative accounting of borrowers’ personal financial situations. A lack of collateral can also present potential stumbling blocks to obtaining working capital.

Lenders may also try to determine how long the company will survive. The survival rate for new businesses after one year is roughly 80 percent, according to the Chamber of Commerce.

5. Industry Type

Traditional small business lenders often have tight restrictions when it comes to approving small business loans for certain industries. Regardless of how profitable your business is, if lenders perceive your industry as risky or unpredictable, they may deny your loan request. For instance, a lender could label the construction industry as being financially unstable, due to its seasonal nature. According to Entrepreneur magazine, outside conditions can also influence a lender’s decision. A quick service restaurant business may have a harder time being approved for a loan when food prices are rising, because the higher prices may make it more difficult for you to turn-a-profit.

Getting denied for a business loan can be a setback, but it doesn’t mark the end of your success in business. Figure out what likely caused your loan to be denied and the required steps needed after your loan application is rejected. Just as lenders must make small business loan decisions, you can increase your chances of being approved by choosing the right lender. If your business struggles to get approval from traditional lenders, contact us to see how QuickBridge can support your company. QuickBridge is proud to be part of a new generation of lenders serving small businesses left behind by the unrealistic expectations of name-brand lenders. We strive to provide the service and working capital that business owners need to succeed.

QuickBridge provides pinpoint funding for your business needs. Contact us to learn more about what fast, efficient financing can do for your company.