Receiving the daunting feedback to tell you a business loan application has been denied is both scary and frustrating. Moreso, if you require the money to continue your business operations or start your business venture.
Fortunately, some common factors may cause a merchant loan to be declined. Putting these factors into consideration strengthens your future applications and makes it easy for you to receive the loan amount you need.
Poor Credit Score
A credit score shows the lender your trustworthiness and specifies the risk level presented by your borrowing. Lenders will evaluate both your business and personal credit score when considering applications. However, a new business will entirely depend on the applicant’s score. A FICO score of not below 680 is the minimum score to qualify for most lending institutions.
A poor credit score may result from bankruptcy, default payments, or even late payments. If your loan application was denied due to your score, you might try these steps to improve:
- Review your credit report to identify areas to correct.
- Make payments on time to create a good credit history.
- Catch up on past-due pending payments.
- Use prequalification tools and know when you are eligible to qualify for credit.
Otherwise, you may opt for financing alternatives such as Merchant cash advance or business credit card.
Lack of sufficient collateral
Borrowers may use valuable business or personal assets to secure a loan. These assets reduce the risk for the lenders when the borrower defaults by seizing the deposited assets to recoup their loan balance. Therefore, a borrower pledges assets of equivalent value to the loan. Unfortunately, if you may lack collateral, most traditional lenders may deny your loan application.
Luckily you may opt for alternative options like lenders offering unsecured loans. However, these unsecured loans come at a higher interest rate to mitigate the risk.
Plenty Of Existing debt
Plenty of existing debt is calculated by a credit utilization or debt utilization rate. Most lenders reject applications of borrowers with a utilization rate above 30%. Higher percentages are viewed as being risky to acquire a loan. Moreover, other lenders will not consider the applications of businesses that fail to demonstrate the use of prior credit. To pose a less risk status, consider responsible utilization of loans and debt management.
If your credit utilization rate hinders you from accessing a loan, take some time to clear your existing debts before reapplying again.
High-Risk business
You may have all qualifications, but getting a loan can still be hectic if you’re in a high-risk industry. For instance, agriculture, restaurants, and construction are considered riskier than other businesses since revenue is maybe unstable. In addition, most vice industries, like online betting, porn, or gambling, are highly unlikely to qualify for loan applications.
While you cannot change your line of business, some alternative lenders cater to the high-risk industry. Unfortunately, these lenders might charge much higher rates or require collateral to mitigate the additional worry.