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- Lenders approve business loans based on proof that the business can repay
- Lenders deny loans for many reasons like poor credit or little cash flow
- Lenders may partially approve the loan if you qualify for less money than requested
Getting a business loan is one of the best ways to get cash to cover short-term needs or accelerate your company’s growth. But not every business will meet the requirements for a business loan or qualify for the full loan amount requested.
According to the 2023 Report on Employer Firms, only 53 percent of small business loans applied for by employer-based businesses in 2022 were approved; 26 percent were partially approved, but 21 percent were denied.
Ultimately, lenders have many requirements for companies that want to borrow money. Here’s a look at factors that could disqualify you from securing a small business loan.
Poor credit history
Every lender sets its own business loan requirements that small businesses must satisfy at a minimum. Lenders will check your personal and business credit reports to assess your creditworthiness. Business owners with bad credit will have a hard time qualifying unless they find a bad credit business loan. Many lenders, especially traditional banks, prefer to avoid taking on the risk of lending to someone with poor credit.
Alternative online lenders are more likely to offer bad credit loans, but depending on the type of loan, you’ll likely need a FICO personal credit score of 550 or higher to qualify. And if you are approved, these loans typically come with high interest and costly loan fees.
For the best chance of approval, high-risk borrowers fare better with nonbank lenders than traditional banks. According to the Federal Reserve’s 2023 Report on Employer Firms, approval rates for mid- to high-risk applicants in 2022 were:
- Nonbank finance companies: 66%
- Online lenders: 65%
- Small banks: 61%
- Large banks: 45%
Limited cash on hand
When you apply for a business loan, the lender will want a copy of your business financial reports, including cash flow and bank statements. The lender wants to ensure your company is generating a profit. It expects to see the revenue deposited into your business checking account. If your company is breaking even or losing money, you’ll unlikely be able to afford payments on a new loan.
Most lenders also set a minimum amount of revenue that they expect your business to make. Some lenders set this minimum to $100,000 a year. Traditional lenders may want to see even more stability, such as $250,000 in revenue per year. If you go with an online lender, the minimum may be set as low as $33,000 per year.
Some lenders will not lend to companies that operate in certain industries. Some industries are high-risk, so some banks won’t lend to companies in real estate, sales, or investing. Other common disqualifying industries include gambling, adult entertainment, dispensaries and cryptocurrency.
Too much debt
If you already have debt, some lenders might be unwilling to offer a loan to your company. This is especially true if you have a significant amount of debt. Lenders primarily care about whether you’ll repay the loan. If most of your revenue is tied up paying other loans, you won’t have enough money to pay the new loan.
To evaluate your level of debt, lenders may calculate your business’s debt service coverage ratio. This ratio looks at how much net income you have compared to your debt load. The goal is to see your profits outpace debt payments.
No business collateral
Secured loans are common in the world of business lending, especially if your company has a limited credit history or poor credit. If your company doesn’t have enough assets to offer as business collateral to secure loan, lenders may not approve your application.
Unsecured loans may be an option, but if you don’t have good or excellent credit, you may have to settle for certain unsecured loans with higher interest rates and fees. This includes options like lines of credit with shorter repayment periods and merchant cash advances.
Poorly developed business plan
If you have a strong business plan with a clear path to having a profitable company, that can help you get approved. Lenders will be less willing to lend to you if you lack direction or have an unclear plan.
Applying for the wrong type of loan
There are many different types of business loans out there, each with a different purpose. If you apply for the wrong one, you’re unlikely to get approved.
For example, many lenders let you apply for an equipment loan to buy equipment that would make your business more productive. But if you apply with a lender that doesn’t allow you to use that type of loan to purchase commercial vehicles, you’ll be denied.
What disqualifies you from getting an SBA loan?
You may get denied an SBA loan if your business could obtain financing elsewhere or has a wealth of assets above the loan amount requested. You also probably won’t get approved if you’ve had a past default on a government loan. Finally, the SBA disqualifies specific industries, including:
- Financial institutions
- Foreign businesses
- Multi-level marketing companies
- Business involved in gambling, speculative or illegal activities
- Rental buildings
- Government-owned organizations
- Businesses with key stakeholders incarcerated, on probation or parole
Having significant assets won’t immediately disqualify you since the lender may allow you to use them as collateral for a large SBA loan. For example, SBA 7(a) loans can fund up to $5 million, but require you to offer as much collateral as possible for loans above $350,000.
Asking for the wrong loan amount
Many lenders won’t approve the requested loan amount because it falls outside your business’s ability to repay or the lender’s acceptable risk level that it’s willing to take. If the funding requested is too little or too far outside the lender’s accepted risk level, the lender may deny the loan entirely or partially approve the amount.
The exact amount of funding your business can get can vary from lender to lender. If you don’t get approved for the amount you need, you could apply or prequalify with another lender to see if you can borrow a higher amount. Just be sure that you can handle the payments by using a business loan calculator to determine how much you can expect to pay.
Alternatives to small business loans
If you have trouble securing a small business loan, consider these alternatives.
Business credit cards
Business credit cards are a popular business loan alternative for a number of reasons. They make it easy to finance small everyday purchases for a short period of time. You don’t have to pay interest if you pay the card balance in full.
Credit cards also offer valuable perks, including fraud protection and rewards. Many business cards also offer cash back that can help you save money or travel benefits that you can use the next time you go on a trip.
Grants are a source of funds you don’t have to pay back. Applying for a business grant is a highly competitive process, but it can be a great source of cash for your company.
Many governmental and nonprofit organizations offer business grants. Some focus on industries, while others serve businesses within certain cities. There are also grants aimed at specific business owner demographics, including:
- Business grants for veterans
- Business grants for minorities
- Business grants for Black women
- Business grants for women
- Business grants for felons
Crowdfunding is a way to raise money from everyday people. The idea is that you can raise small amounts from many people.
Crowdfunding is a popular way to pre-sell products, get paid upfront, and use that money to produce the goods you ship to customers. Community-based businesses might also use crowdfunding to get money from customers who want to see them succeed.
Peer-to-peer lending relies on regular people investing in a loan to your business. Each investor only puts in a small amount of money. Spreading the risk out in that way means peer-to-peer lending is still an option when traditional lending isn’t.
One drawback is that peer-to-peer lending may have higher rates and fees than some business loans. It can also take a while for investors to fund your loan, making it a poor choice for companies that need quick cash.
Bootstrapping refers to funding your business yourself. There are three stages of bootstrapping:
- Beginner stage. You put your own money into the company or get cash from friends and family. You then try to build the company from scratch, often while keeping your full-time job.
- Customer-funded. This stage relies on the revenues you receive from customers to keep the company running and growing.
- Credit stage. This stage involves focusing on specific goals, like hiring staff, buying new tools, upgrading equipment, and using venture capital loans to finance those goals.
Getting financing can help your company grow, but you have to first meet the lending requirements for a business loan. If your company is disqualified from getting a loan, consider alternatives like crowdfunding or business grants to get the cash that you need.
Frequently asked questions
To apply for a business loan, first review the lender’s small business loan requirements for credit score, time in business and annual revenue. Then, gather documents to prove your ability to repay, including business and personal bank statements, tax returns, business licenses and business formation documents. Use that information to fill out the loan application, and work with representatives to provide any additional information they need.
Getting a business loan is hard because lenders are risk-averse. They don’t want to give money to businesses that might run into hard times and default on a loan. This is especially true when there is a threat of an economic slowdown. Lenders prefer to lend to established companies and may keep tight requirements to get a business loan.
Some ways of increasing your chances of getting a business loan include:
- Improving your personal and business credit scores
- Boosting revenues
- Increasing the company’s profitability
- Paying off other debt
- Offering collateral