Although there are more small business loan options available today then ever before, it’s not a guarantee that any particular loan application will be approved. Depending upon a borrower’s credit profile, time in business, and the lender they choose, accessing borrowed capital can still be a challenge for many business owners.
For borrowers who find themselves in that situation, it’s important to understand the reasons their application was rejected, so next time they can point their loan request in the right direction to better position it for success.
Common Reasons a Loan Application Might Face Rejection
Many small business lenders (including traditional banks, online lenders and others) have different criteria for the loan applications they will approve, but here are three common reasons for rejection and what you can do about it:
- Your business is a startup. With a track record of less than a year, startups often struggle to qualify for a small business loan with many lenders. Traditional lenders like banks and credit unions often like to see several years under a business; and many online lenders like to see at least a year. Because idea- and early-stage startups often don’t have a clearly defined revenue stream—or have no revenue at all—it compounds the reluctance of many lenders to advance credit to very young businesses. It may be difficult in that first year to find a small business loan, but there are ways to access capital and strengthen your business credit profile, improving the odds of success down the road. Establishing credit relationships with vendors and suppliers will help you build your credit profile—and is relatively easy to do—even for very young companies. It may even be as easy as just asking.
- You lack collateral. Most traditional lenders rely on collateral to mitigate the risks associated with a small business loan. Unfortunately, some small business owners lack the specific real estate, equipment, or other assets the bank would accept as collateral. Although truly unsecured business loans are rare, there are lenders (including some online lenders) that don’t require specific collateral, but rather a general lien on business assets to secure a small business loan. For businesses that have been doing business for at least a year and have an otherwise healthy business, this may be an option for those without the specific collateral required to secure a loan – and could allow you to qualify for more than you would with a traditional loan. This is because your loan amount would be based on the strength of your business, not the value of your collateral.
- You have a less-than-perfect credit profile. In addition to maintaining a good personal credit score (a prerequisite that will likely never go away for most small business owners), building a strong business credit profile is an important part of leading a successful business. A weak business credit profile or a low personal credit score can make qualifying for a small business loan difficult. For example, a personal credit score below 680 may make it challenging to get a small business loan from the bank and a score below 650 will make an SBA loan problematic. Some online lenders will work with business owners who have lower personal credit scores provided they otherwise can demonstrate a healthy business, but the better the credit profile, the more financing options will likely be available. Take actions that will help build a strong credit profile. Become familiar with the major credit bureaus for both your personal credit score (Experian, Transunion, and Equifax) as well as those for the business bureaus (Dunn & Bradstreet, Equifax and Experian). Make sure your profiles are accurate and up-to-date. If your business profile is “thin,” in other words, you don’t have many credit accounts, work with suppliers as mentioned above, consider applying for a business credit card, and make sure the suppliers you do have credit relationships with report to the appropriate reporting agencies. Additionally, make sure you make regular and timely payments to your creditors—that includes your utility bills like electricity or phone. Paying your bills on time is the single biggest thing you can do to build a strong credit profile.
There are many potential reasons a loan application might be rejected; these are three of the most common. Bouncing back from rejection with a strategy to improve the odds next time should be the goal. Most lenders really want to know the answers to these three questions: Can you repay a loan? Will you repay a loan? What will you do if something goes wrong? If you can successfully answer these three questions, you’ll greatly improve the odds of qualifying for a small business loan.
Try not to take rejection personally. Use it as an opportunity to make your next application even stronger.
About the Author Ty Kiisel is a contributing author focusing on small business financing at OnDeck, a technology company solving small business’s biggest challenge: access to capital. With over 25 years of experience in the trenches of small business, Ty shares personal experiences and valuable tips to help small business owners become more financially responsible. OnDeck can also be found on Facebook and Twitter.