Why Does A Business Loan Application Gets Rejected?24 May 2019
New businesses can be unpredictable. As they say, no two days are the same in business. And on any given day, good or bad, one thing that influences a business, especially one that took shape recently, is money.
For businesses with a money crunch, loans are a lifeline to help make the most of an opportunity, or at times even to assist in simply covering the expenses. It is therefore frustrating when the small business loan application that one was counting on comes back with the message – ‘business loan denied’.
Although discouraging, given the small business loan rejection rate there are many businesses, even successful ones, who have to face this. It is, therefore, crucial to understand the reasons why a business loan gets rejected and how can one avoid such a situation.
Let’s explore further,
Why Would A Loan Application Be Rejected?
1. Credit Score
A credit score is a numerical expression of an individual’s credit files, representing the creditworthiness of an individual. It is also one of the primary reasons why a financial institution might have refused a loan. Many a time, entrepreneurs are either not aware of their business’s credit score, or they do not know where to find information about it. A few business owners also do not know how to interpret this score.
When applying for an unsecured small business loan, an unhealthy credit score can lead to rejection as it reflects the riskiness of investing in the business and also the budget and expense management skills of an organization. Having an ideal score emphasises financial prudence.
An important point to note here is that merely having a functional and profitable business does not guarantee that the credit score will be sterling. Small missteps too can be damaging. Along with this, the personal credit score of the applicant also affects the business’s credit score.
The good news is that there are many ways to repair the damage done and build the credit score, like,
- Clearing outstanding payments
- Keeping debts low
- Avoiding opening up too many lines of credit
- Keeping existing credit accounts open with a timely repayment structure
When in need of a business loan, improving credit score should be on top the list of changes one would want to bring to increase the chances of getting an approval on the application.
2. Cash Flow
Inadequate cash flow is another reason that prompts a financial institution to decline a business loan. Lenders want to ensure that the business is capable of repaying the loan each month, along with covering other operational expenses like rent, equipment maintenance, inventory, payroll, etc. Income minus all expenditures is calculated to determine the real income of a business.
Having clarity on how much money flows in every month and how much is being spent, along with the fact that there will be adequate cash flow to support any other credit in addition to repaying the new loan, is helpful when applying for a business loan.
A few small ways to solve cash flow issues are,
- Maintain proper invoicing
- Institute late fees
- Have an emergency fund
- Cut unnecessary expenses
3. Early Stage Start-up
A business has to start somewhere, however, start-ups face financing problems a bit more than an established business. While walking up to an investor to kickstart a business idea works most of the times, once the business picks up, lenders start checking the track record of healthy revenues and experience in the market.
At times like this, one can approach financial institutions like KNAB Finance that offers collateral free small business loan with quick disbursal. Their easy application process through the website has made them a preferred choice among business that faces problems elsewhere.
As the primary concern for a potential creditor is repayment of the loan, an outstanding debt ( especially a huge one) compels them to reject a small business loan application. It is therefore recommended to maintain a low credit balance and pay all past debts at the earliest. This also helps improve the credit score.
Related Article: How Can KNAB Finance Business Loan Benefit Your Business
Another factor that influences the money lender’s decisions is if your venture is risky. There are many dominant factors in the economy of a nation that affect a business, like the fuel prices if you are into logistics, etc.
Ensure that you do your homework and keep yourself abreast with the micro and macro-economic factors, industry trends, and political developments surrounding you to make sure you grab the right opportunities at the right time.
5. Business Plan
Having a weak or unclear business plan or not having one at all is also one of the reasons for the rejection of a loan. A lender, in order to take a business seriously, needs to see a high-quality, solid business plan that portrays significant preparation and a sense of where your business is headed.
A financial adviser or business consultant can help form a plan and polish the business strategy and financial projections.
Along with this, one must also conduct an in-depth study of the market factors before presenting the documents required for business loans to get an unbiased and pragmatic consideration of the business possibilities a scenario offers.
Before Re-Applying a Business Loan
Before one sets off to re-apply a business loan, considering the following can be helpful,
- Checking for any red flags in the credit
- Having sufficient income to repay the loan
- Examine the credit report to anticipate any problems
- Fixing human or computer errors in the credit report
- Paying off other debts
When the economic scenario takes a dip, it is quite common for a business to struggle to keep its head above the water. Loan rejections can be discouraging, however, it is not the final straw in the survival of a business.