For businesses operating on a tight financial situation, it is very frustrating to have a bank refuse your loan application. But it can also be the opportune time to rethink your submission strategy, learn your mistakes and come back prepared next time.
The first thing a savvy business loan applicant does is to find out why the bank rejected them. Legally, your commercial finance provider should send you a denial notice and explain in it their reason(s) for taking that path, but only a few bankers go by the book.
Nevertheless, these are the most common whys your submission didn’t earn you a loan.
1. Too low credit score
Credit Score is factor number one. If yours is “too low” in the eyes and standards of your lender, then they may deny you the funding. Personal credit score factors into business financing applications even if the firm is still new in business. If your personal credit is a mess, then the assumption is you won’t be trustworthy when repaying a business loan.
If you discover poor credit is the culprit behind your rejection, start by learning what is affecting your score and begin rebuilding it. Understand the factors being assessed so you can keep good business as well as personal credit.
2. Too “risky” Industry
Does your industry appear among the sectors banks classify as “risky”? Find out whether what you do is considered risky. Business in risky categories like adult sites and gambling may also have a hard time getting a small loan.
If being too risky is why they the cancelled your request, then you are probably searching in the wrong place. It is probably a sign you should consider alternative merchant funding.
3. Unfinished paperwork
Most business merchants get everything else (or most of them) right only to present incomplete paperwork. Find out whatever credentials your moneylender needs and make sure you have ALL of them before submitting your official request. In a nutshell: Prepare your paperwork before making the next application if that’s why your previous request was denied.
4. Too little time in business
Startups, without months or years of records, may not be well-placed to qualify for micro-business loans. Most service providers are slow to report your payments to the credit agencies which means your files could be empty by the time you submit a request. Make it your duty to report payments for any account you set up with a vendor so you can establish proper credit history for your startup.
5. Not enough Collateral
Many conventional banks prefer collateralized loan products. So lacking the right amount or type of collateral could be a stumbling block. And your only remedy for this situation is tapping into alternative funding sourced, e.g., unsecured loans.
6. Too High (or too low) debt use
Usually, moneylenders expect a borrower to tap into no more than 30% of the total credit they are eligible to. Over-or-under exploiting your debt reservoirs portrays you as a financial risk.
Make sure you keep record your debt history (even if you don’t like to utilize debts) no matter how small the debt is. Monitor your credit limits, and keep a rational debt usage.
Having your loan request turned down can be disappointing and disorganizing. Avoid these loopholes to improve your chances of qualifying.