One of the most frustrating parts of trying to get a business loan is when your application is denied. This is a blow to your confidence because you have a plan to get your business to a high level of profits. Without that business loan, though, you are looking at staying at the same level as you are. Money makes the world go around, and without it, you have no chance of expanding or improving.
You can always call and ask your lender why you were denied, but sometimes it is easier to find the answers on your own. There are many reasons the lender may have rejected your application, and you may even have an idea of why, but you still need to know for sure.
Below you will find the 7 most common reasons why a business loan is denied. See if you fall under one of them. If not, you may have to give in and give the lender a call to get an answer.
1. Existing Debt
One thing that the lender will dig deeply into is your finances. If they find that you have some substantial amounts of current debt, they will tell you to pay it down and then reapply. Not having your debt paid off may not be an indication of not being able to manage money, but it does show that you have monetary obligations elsewhere. It makes you a higher risk for them because you may choose not to pay them back.
Plus, there is always the chance that you are planning to use the money that you get loaned to you for something other than what you told them. You may be planning to use the money to catch up on your debts, which is a good thing, you would think. The lender looks down at it because you are not putting the money into something that will have a good return.
2. Credit Score
One of the most important financial numbers you can have is your credit score. This little number tells a lender a substantial amount about you. It is the single most used factor when deciding if they will be accepting your loan application or not. The higher the number, the better chance you have.
But that is not the only thing they are looking at on the credit report. They want to see if you have a good payment history and will investigate how well you keep up with your bills. There will also be a section in your report that shows them if you live in one place, which shows stability, and how often you change jobs, which shows responsibility.
The lender will not want to take a chance on you if they ran your numbers through the iSelect Business Loans Calculator and found that you did not have enough collateral. They want you to put something on the line that the bank could sell if you went into default. Something worth enough money to cover the bank loan and hopefully the interest they have charged to your account.
The lender will deny your application if you do not have enough to offer. They are in the business of making money. They would prefer to avoid getting into any circumstances that may make them lose money on their investment. That means if you cannot cover the amount of the loan with the items and property you currently have, they would rather gamble on someone else.
4. Business Performance
How your business performs is a good indication of how much money it will bring in every month. Money is what it is all about, anyway. The lender will need to see proof that your business performance is at the top of the industry. If it is not, the loan will be rejected without a second thought.
They will look into your profits and expenses and compare the two. Suppose your business shows more going out than what is coming in. In that case, it shows a performance curve that cannot even pay for the company’s daily operations. This is a red flag to the lenders, and it will put you in a pile of applications that they were not willing to take a risk on.
5. Missing Information
It is crucial to ensure you hand in all the documents they have asked for. When you first applied for the loan, you should have offered all the documents you had used to fill out their application. If this was not enough for them, you should have been told what you needed to turn in.
Do not put this off because the lender is waiting to proceed with your request. They will not wait long, though. If you do not provide the information they wanted in a timely fashion, they will simply boot your application out and stamp a denial on it without checking into your data any further.
6. Chosen Industry
There are many industries that lenders feel are risky or not risky, by what you do, such as working in the construction field on skyscrapers. The lenders are looking to see if your industry has the potential to earn substantial amounts of money, or if it is a risky industry that does not have a good track record of making a good income. If they see any problems with your niche or industry, they would rather deny your application than take the chance that you will be the exception.
7. Business History
The final aspect of your application that the lender will consider is the history of the business. If you have not been in business for very long, it is hard for you to show that your business is profitable. Even if your first couple of months brought in more profit than would be projected, it does not mean you can keep the same return from your product or service.
If any of these things are in the back of your mind, you have probably figured out why your application was denied. If none apply, you should take a few minutes to call and ask why. Once you have the answer, you can work on fixing it until the time comes up when you can apply again.
It cannot be stressed enough that you need to be prepared and confident when you go in to meet with bankers, lenders, or investors. As you are filling out the original application, pay attention to what they are asking for. If you need a document to file out the paperwork, put them aside in a folder and turn them in with the application.