It’s not uncommon for a business to try to get a loan from a lender to improve their business in some way. However, for a variety of reasons, those loans often don’t get approved. You won’t have to guess why your loan wasn’t approved, because the law requires banks to inform you as to why your loan request was denied. Below are some of the most common reasons why business loans are denied.
The Industry Is Too Risky
There are certain industries lenders consider too risky and, therefore, won’t approve a business loan related to that industry. The restaurant business, for example, is considered high risk because 60% of the restaurants fail during the first year of operation, and 80% close down by their fifth year.
Other factors why industries are considered risky are unexpected rising fuel prices, no one in the company has business experience, saturated market (too much existing competition), the industry is too niche (not broad enough), or too much money is needed upfront. These are some of the reasons that could keep a company from making a profit and repaying a loan.
Fee Navigator lists these industries as industries considered to be the riskiest by banks:
Accounting
Agriculture
Alcohol
Construction
Financial services
Food
Insurance
Media
Oil
Real estate
Retail
Transportation
Travel agencies
Wholesaling
Low Personal Credit Score
Even though it is your business that will be receiving the loan if approved, the bank wants to know what your personal credit score is. If you have a low credit score, that tells them you are not good with your credit. And if you’re not good with your own credit and obligations, why would you be any different in your business? This makes them question how reliable you will be in making your required payments on the loan. If you’re wondering what are the most popular reasons why business loans are denied, a low personal credit score is in that group.
If your credit is lower than 700, you definitely need to work on raising that score before trying to request a business loan. Ideally, you want at least a credit score of 720, but probably higher. Try to pay off whatever debt you can, contest any potentially incorrect issues on your credit report, and be sure to never miss any payments. The stronger your personal credit score is, the more likely it is you’ll get approved for a business loan.
Too Little Time Being in Business
If you haven’t had your business very long, you probably haven’t had a chance to build an adequate credit history for your business to qualify for a loan. While there is no set amount of required time in business, most lenders want you to have been in business for at least one, two, or three years, depending on who the lender is.
If this is a reason your business didn’t get qualified for a loan, you should shop around for different lenders because another lender might not have such strict guidelines for time in business.
To make sure your business does build credit when possible, be sure to have your new vendors and suppliers report your timely payments, as this will help build your business credit. Sometimes they will fail to report your payment history if you don’t ask them to.
Weak Cash Flow
When lenders are considering approval of your business loan, one of their largest considerations will be your business’s cash flow. First of all, they want to know that you have enough cash on hand to cover your daily operating expenses, your business’s loan requirements, and a cushion of cash to fall back on in case of some unforeseen event that could hamper your business. There are industries, especially tourism-related, where cash flow is slower during summer months and stronger during others. This is to be expected and a business should prepare appropriately if that is case. However, if the business commonly has an irregular cash flow without a good reason, that would be enough to prevent approval of a loan. The reason could be from poor management of your cash flow, or it could be an indication of another problem such as bad location, volatile industry, or something else.
Missing or Incomplete Application Requirements
This reason for not getting approved for a loan is probably the most preventable. There are certain things you must include with your loan application, and failure to do so will likely cause your business loan to be denied. When you are filling out your application, do it slowly and accurately and make a list of everything you’ll need to complete it. Don’t even try to turn it in if you haven’t included everything required from you in the application. There are financial statements including credit reports, contracts, tax returns, a business plan, and bank statements. There are also several components of a business plan you must complete as well. If you want to ensure the greatest probability of loan approval for your business, simply include everything that is required. This is one of the most fixable reasons why business loans are denied.
Insufficient Collateral
To be approved for a business loan, your business cannot be flat broke with no assets. You have to put something down as collateral before your business loan is approved. This could be cash, equipment, vehicles, your land or building, or maybe even your own house. Whatever it is, lenders want something to fall back on in case your business fails and you cannot make your payments.
Too Much Debt
It does not look good to lenders when you are using more than 30% of the total credit available to you. Your credit cards, for example, might have $50,000 worth of available credit. If you have charges of more than $15,000 on those cards, that will impact your chances of getting a business loan. You need to pay down that credit card debt until you’re below 30% ($15,000) of your available credit. Another way to get below that 30% is to request additional credit from your credit card company. If you increase your $50,000 worth of available credit to $55,000, your 30% maximum now becomes $16,500. By asking for more credit, you have automatically put yourself below the 30% threshold and repositioned yourself from high risk to low risk.
Previous Bankruptcy
Bankruptcy should never be taken lightly. If you file Chapter 13 bankruptcy, it will take seven years for the bankruptcy to be removed from your credit report. If you file Chapter 7 bankruptcy, it will take 10 years to be removed from your report. If you want a business loan after that, even though it is possible six months to a year later, most banks won’t consider loaning to you for up to five years after that. Bankruptcy isn’t as common as the other reasons why business loans are denied, but they are one of the most difficult to fix. If you need a business loan, you must be patient, wait until the bankruptcy is removed from your credit report, and then keep trying until a bank will approve your loan.
It doesn’t have to be a difficult process to keep your finances healthy in case you need a loan for your business one day. Don’t take chances with your credit, and keep your credit utilization ratio low (below 30%). Make timely payments, don’t close out any accounts, and ask for more available credit. When you try to get a loan for your business, be prepared with everything that is required before submitting your loan application. Don’t be in a hurry, be thorough, and you’ll increase your chances of being approved for a business loan.