As a businessman, nothing’s worse than running short of funds, especially if your small business loan application keeps getting rejected.
Why is your business loan denied? Well, for one thing, different lenders have different requirements and standards. Thus, the reasons for the rejection of a loan application can vary.
Before you can master the process of applying for a business loan, it’s best to be aware of the different reasons behind the rejection of your loan application. If you know why a lender might deny a loan application, you can better tailor your own application to avoid possible rejection.
To help you understand the process better, here are five reasons why business loans are denied.
1. Poor credit score
The most common culprit is a bad credit score. When a lender finds out that you have a low credit score, it will make them think twice about how you will be able to repay your debts and be a reliable borrower.
If you suspect that you have a bad credit score, there are many ways to fix it before you apply for a loan. You can start by reviewing your personal and business credit reports. Brush up on what’s inside it, find out and understand why they evaluated you that way.
As a rule of thumb, even before you need to take out a loan, you should take pains not to damage your credit score. There are a lot of options available for you out there and it is still not too late to save yourself from acquiring poor credit scores.
2. The industry is risky
Certain industries are considered risky by some lenders. They view this kind of businesses as a gamble, with it having a notable track record of failure, thus making it hard for applicants to acquire their loans.
If your business fall in such categories, you may find it hard to get your loan application approved. But it is not yet the end of the world for you. There are certain lenders that finance certain industries making your business viable for a loan.
Different financial institutions have different lending criteria so make sure to do your research first to be able to qualify and prevent having your business loan denied.
3. Limited or insufficient collateral
Applying for a ]business loan will require you to lay down a collateral as a security for your lender. And if by chance you don’t have enough, or you lack the required collateral needed from you, you may end up getting rejected.
If you are stuck in this kind of situation, the best thing that you can do is search for alternative ways and look for alternative sources that can finance you without much of a need for a collateral but will still consider your loan application.
Also, before submitting your loan application, double check if your assets meet their collateral requirements. Maximize your resources and find the perfect lender for your financial needs.
4. You are debt-ful
If you or your business is already buried at debt, other investors and lenders might think more than twice about granting you additional credit.
See to it that, before you apply for a new loan, settle down all your previous balances or any record of credit that you have.
If you still can’t afford yet to clear your debts off, you can negotiate with them or better yet forget about acquiring a new loan for it will only weaken the chance of you getting approved.
The primary concern here is repayment. Maintain a low credit balance and pay away all your past debts and you will surely ace your application for a business loan.
5. Incompetent cash flow
Lenders will review your cash flow to determine if whether or not you can repay back your debts on time. Some even do a comparison between identical businesses in the same industry to determine what your cash flow results say about your company.
A good cash flow means high profit and by having a high profit, you are in the position to pay off existing loans, and that’s the way lenders like it.