Top Reasons You’ve Been Rejected For A Small Business Loan

After carefully evaluating the costs of starting and operating your business, you realized you need a little financial assistance. You decide to apply for a small business loan through a local bank or credit union. You gather the appropriate documentation and complete several applications, but unfortunately, you learn you’re not qualified.

Small business loan application rejected

What went wrong? More importantly, how can you improve your chances of getting approved for a loan in the future?

Your Business Lacks Credit

There’s a risk for lenders every time they issue a loan to a customer. While the hope is that you’ll receive the loan and repay it, that doesn’t always occur. That’s why banks, credit unions, and private lenders use specific metrics to determine the level of risk.

One of the most significant factors is creditworthiness. They evaluate your financial history to determine how well you’ve managed credit in the past. If your business is new (or hasn’t started yet), there’s no financial history to evaluate.

Ultimately, the lender will use your personal credit. If you have poor credit, they will likely reject your application. If you want to improve your chances of getting approved for a loan, you’ll need to improve your credit or wait until your business has developed a more substantial financial record.

You Have Too Much Debt

Lenders need to know if you have the financial means to repay the loan in a timely fashion. So, they assess your debt. If you already have too many obligations, this reduces the amount of money you have to dedicate to repaying the loan. Not to mention, if the debt is a result of defaulted loans, missed payments, or collection efforts, this is a telltale sign for lenders that you may not keep up with your loan.

If you’re inundated with debt, getting approved for a small business loan is highly unlikely. If you’re going to increase your chances of getting approved in the future, you need to get your debt under control. Working with a debt consolidation consultant may be ideal in this situation. They can evaluate your finances to help you determine the best approach to reducing and managing your financial accounts.

You Don’t Have Enough Income

You can have decent credit and minimal debt and still be rejected for a small business loan. Why? Because you don’t have enough income. Lenders ask applicants to provide proof of income in the form of pay stubs or tax records to see how much you have leftover (after everyday expenses). If you don’t have an income source or generate enough income from your business, how will you afford the monthly installments?

If you’ve been rejected for a loan because of your income, you’ll need to find other sources. Having a full or part-time job can help increase your chances of approval. Another option is to get another job or side gig to increase your annual salary. Otherwise, you’ll have to wait until your business starts generating enough income to satisfy the loan payments.

You Need Collateral

As a means of reducing risk levels, lenders will ask borrowers to provide collateral. It’s something of value that can be used to cover the cost of the loan if you default. Common types of collateral include real estate, business equipment, inventory, investments (stocks and bonds), invoices, and cash. If you don’t have any of these things, the lender may opt to deny the loan.

If you don’t have any collateral to offer, your best bet is to apply for an unsecured loan. These are loans that don’t require borrowers to have collateral. Lenders often charge higher interest rates to reduce any risks.

It’s not uncommon for entrepreneurs to turn to small business loans to acquire the money they need to get started. Be that as it may, getting approved for a loan isn’t always easy. As lenders prefer to work with creditworthy borrowers, they use several factors to determine eligibility. If you were rejected for a loan for any of the reasons listed above, it’s best to make the necessary changes, allow some time to pass, and try again.

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