Your business loan application gets rejected due to some common but clear reasons. The earlier you know about them, the safer the next loan application can be. These reasons are fixable if you are ready to invest some real effort.
Know the reasons and fix growth issues as well
If you work on the factors that cause a lender to reject your application, your business will grow better. If it happened due to irregular cash flow, you need to fix that. Once that problem is over, not only will you get the loan, but also your business operations will work well.
Here are all the known causes that make the lenders reject your loan application.
Insufficient business revenue
A business exists to earn revenue. Hence, it runs on it. Earning profit is vital not only for business operations but also to pay debts. If you apply with an improper flow of income, the lender cannot approve your funds.
Before applying, fix this issue and ensure that you are earning regularly. Lenders need to see provable revenue, based on which they approve the loans.
Common cash flow issues that cause rejection
- Irregular or seasonal income patterns
- Dependence on only a few projects or clients
- Higher operational expenses than income
Consistent poor credit score till recent times
These days, the lenders have credit-friendly loan policies. It means you can get business loans for bad credit. But for that, the recent payment record should be clean for a short-term loan.
If your business bills and debts have been paid on time in the recent six months, approval is possible. These six months are the latest right before applying. Therefore, make sure you pay attention to this factor.
Key red flags about poor credit history –
- Previous loan defaults
- Consistent low business or personal credit score
- Delayed or missed payments on existing debts
Incomplete and inaccurate documents
Due to incomplete and inaccurate documents, loan providers cannot check your affordability. They don’t get to know about income, profit margin, financial stability and creditworthiness.
When you fill out the application form, fill in all details perfectly. These days, online verification reveals all your financial details. Hence, there is no use in hiding any factor.
Documents reviewed by lenders are –
- Profit and loss statements
- Bank statements
- Tax returns
- Cash flow statements
- Balance sheets
An unclear business plan
A business plan explains the nature of the business, its goals, achievements, and plans for the future. Market analysis and factors that contribute to growth are part of the plan, too. For a business loan, you need to mention the purpose of the loan. Also, describe how the funds will be used.
An unclear business plan shows that you are not confident about your business growth. This also shows an unstable business, which is a big concern for the lender. If you want to avail funds, make sure you are not lacking in this point.
Common business plan issues are –
- Unclear loan purpose
- No defined repayment plan
- Unrealistic growth projections
Applying for the wrong loan type
Every business loan type has its own specific purpose. Also, it demands a level of financial stability. Hence, if you miss that part while applying, loan rejection is evident.
Example – applying for a short-term loan to expand your business is wrong. Similarly, asking for long-term funds without an irregular income is not wise. These are the best situations to invite rejection. Do proper research and know the loan type and the purposes it solves.
Wrong loan type issues include –
- Short-term loans for big-scale projects
- Loan amount beyond business repayment ability.
- Product mismatched to business state.
Industry risk or business type
High-risk industry businesses usually struggle to get a loan approval. This makes things difficult for the lender as well. Some industries are high-risk due to high volatility, failure rates and regulatory challenges.
Businesses in such sectors have to face stringent lending conditions. One tiny factor gone wrong, and the lender rejects the application. Is your business risky? If yes, then you need to be extra cautious about eligibility and affordability rules.
Risky industries include –
- Hospitality and tourism
- Start-ups in unregulated sectors
- Real estate and construction
Frequent loan applications
Applying for loans makes your business look credit hungry. A business that consistently applies for loans is surely financially unstable. Also, this includes applying to many lenders in a short time.
When you apply for loans many times and to many lenders, multiple search footprints show. This further drops your business credit score. Also, if any lender has rejected your loan application, that too harms your credit record. No finance company wants to fund a business that is surviving on loans only.
Results of applying frequently –
- Reduced creditworthiness
- Higher rejection possibility
- Perception of financial issues in the business
Lack of collateral or guarantee
If you apply for a long-term or secured loan, collateral or a guarantor is a vital condition. Failing to fulfil this condition is the strongest reason for loan rejection.
It is important to work on these factors and make necessary arrangements as required. Read the loan terms carefully and leave no loopholes. Preparing again for a new application takes time. Also, you have to wait before the next application after a rejection.
Collateral relevant issues are –
- Low-value assets
- Lack of acceptable security
- Assets used in another loan as collateral
High existing debt
With already a considerable burden of debts, how will you pay the new loan repayments? This is the concern a lender will have if you have high existing debts. After all, approval decisions are subject to affordability.
If you really want to get the loan, downsize your debts before applying. Only in that case, your loan can be approved. With multiple other debts, it is not possible to get a loan. Consider consolidating or refinancing debts to reduce the debt burden. Affordable debt consolidation loans in the UK for bad credit are available. Prove repayment ability and apply for the funds.
Debt-related issues are –
- Many active loans
- Multiple credit lines
- Frequent short-term borrowing
- High monthly repayments
- Credit-mix imbalance
How to boost approval chances?
Approval chances can be improved if you work on the tips below.
- Know the loan type – before applying for a loan, do the proper research. Know about its eligibility conditions. If your business lacks in some point, first fix that.
- Reduce debt – With a big debt size, it is foolish to apply for a new loan. No lender will ever take a visible risk of default. Pay some of the small debts completely. This makes space for new loans.
- Gather the right documents – Never miss the documents due to accuracy. Also, collect all the documents (digitally as well) in one place. Read the required documents and submit precisely.
Final thing is…
If you avoid all the mistakes mentioned above, loan approval is possible. You don’t intend to leave the loopholes while applying. Sometimes it happens due to ignorance. But if you do it because of carelessness, it is better to be careful this time. Rejection creates a drop in your credit score. Hence, be wise while applying.
