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Loan Blown? 7 Common Reasons Why Small Business Loans Get Denied

Most successful businesses begin with a big idea and a smaller bank account. Most new small business owners require a business loan to make their dream a reality. Getting your hands on a loan can be the difference between your business taking off or taking a nosedive. Seeing the word “rejected” on your loan application can feel like a devastating blow.

Lenders can deny loan applications for a variety of reasons. Keeping a pulse on the most common reasons a business loan gets rejected will help you obtain the funding necessary to get your business off the ground. If you’re concerned that you might be left feeling loan blown after your application, consult this list of the seven most common reasons why small business loans get denied. 

Poor credit

While exciting for credit enthusiasts and discouraging for low-score havers, a lender will consider your personal credit score and business credit score when reviewing your application. A less-than-stellar personal credit score might send lenders walking the other way.

Business owners with a below-average credit score should look into snagging their small business loans from less stringent marketplace lenders who may be more willing than mainstream lenders to cut you some slack. 

Subpar collateral

If your business doesn’t have much collateral, you may find pre-qualifying for a business loan to be a challenging undertaking. Traditional lending institutions prioritize the presence of a substantial amount of collateral that is positively proportional to the amount of money your company needs.

Property, business equipment, or even personal assets can be considered collateral. If you’re in the early stages of looking for a loan that suits your company, you should crunch the numbers on how much your collateral is worth before submitting your application.

Low or declining revenue

When your business has a low or declining revenue, most major lending institutions won’t feel confident that you’ll be able to pay the loan back. If the financial paperwork you provide in your application doesn’t demonstrate a consistent revenue stream, your lender might interpret your business as unstable. Consider waiting for your revenue streams to confirm an upward trend before attempting to secure your loan. 

Risky industry

Whether or not your loan application is accepted can depend on the industry to which your business belongs. Since specific industries, like the restaurants market, demonstrate a more significant risk of failure than others, your bank may interpret your participation in a particular sector as a red flag that you could default on your loan. 

Too much debt

Similar to a bad credit score, having too much existing debt will make you an unattractive loan recipient. When a lending institution looks at your application, they will consider the ratio of your business’s income to the amount of debt associated with the company.

Generally speaking, your net operating income ratio to your annual debt payments has to be at least one for your business to be a reasonable loan candidate. 

Newness of business

One of the most frustrating obstacles that small businesses face when applying for a loan surrounds the age of their institution. If your small business hasn’t been open for very long, lending institutions will hesitate to give you a loan. 

Many traditional lending institutions prefer to see two years’ worth of business financial records to prove the business’s income, debts, and credit score. 

Economic conditions

While out of the owner’s control, economic conditions will likely play a role in how readily a lending institution offers money. If the nation is experiencing a recession or economic crisis, banks may be more judicious when engaging in their lending practices.

Final thoughts

Applying for a business loan can be intimidating. Luckily, business owners who do their research and avoid common application mistakes can plan on taking this advice to the bank.