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- Lenders deny loan applications due to reasons like poor credit, insufficient collateral, industry and more
- Getting denied a small business loan doesn't mean businesses can't secure one in the future
- Before reapplying for a loan, determine why the previous application was denied and make sure you’re applying with the right lender
Starting or growing a business may require financing, but not all business loan applications are successful.
According to the Federal Reserve’s 2023 Report on Employer Firms, 21 percent of surveyed loan applicants were denied for loans in 2022. That number is expected to go up, considering lenders are expected to continue tightening their lending standards for the rest of 2023.
We’ll explore the most common reasons for denial and provide solutions to increase your chances of approval when reapplying for a small business loan.
1. Too much debt
If your business carries a significant amount of debt, it may hinder your ability to repay a new loan. Lenders view excessive debt as a risk because it can lead to default. And if you default on a business loan, a few things may happen, including the lender seizing business or personal property to recover the borrowed funds.
Your best course of action is to focus on reducing your existing debt load. You can do this by renegotiating terms with creditors, consolidating loans or making additional payments. Also, limit the use of your available credit, which adds to your debt and impacts your ability to build business credit.
2. Bad credit
A business owner with bad credit is a red flag for lenders. It suggests that you may struggle to manage your finances.
If you have a history of late or missed payments and defaults, consider making a few changes to how you manage your personal and business finances. For example, set up autopay so bills are paid on time and review your credit report to dispute errors and inaccuracies.
You won’t see immediate changes to your score. So if you need funds right away, look into lenders who specialize in business loans for bad credit.
3. Don’t meet the lender’s eligibility requirements
Failing to meet a lender’s eligibility requirements for a business loan can result in denial. All lenders have specific criteria related to credit scores, annual revenue, time in business and other factors.
It’s important to review the eligibility requirements of potential lenders before applying. If you don’t meet the lender’s criteria, consider alternative lenders. But if you are set on working with a specific lender, focus on improving your business’s financial health so you qualify for a loan.
4. Not enough collateral
With a secured small business loan, businesses must pledge assets that can be seized if they default on the loan. Since the collateral for a business loan is used as a form of repayment and needs to cover the outstanding balance on the loan, if these assets aren’t of significant value, lenders may deny your loan application.
You can work to build up your business’s assets so you qualify for secured financing options in the future, but if you need funding as soon as possible, explore alternative financing options that don’t require collateral.
Online lenders typically offer a variety of unsecured business loans, including business lines of credit and merchant cash advances. Loan amounts will likely be significantly lower than secured business loan amounts. If you don’t have a high credit score and strong business financials, you may see loan amounts of $100,000 or less.
5. Not enough free capital or cash flow
Lenders want to see that your business has sufficient cash flow to repay the loan. If there’s no evidence of enough free capital or cash flow, they can’t approve you.
Before applying for another small business loan, complete a cash flow analysis to figure out ways to better manage your expenses and free up cash so you can afford the monthly payments. You can also increase your revenue. The required annual revenue varies, but if your business brings in at least $100,000, you could get approved with some online lenders.
You can also explore invoice factoring or merchant cash advances, which are short-term business loans designed to help businesses that need quick access to capital.
6. Don’t have a business checking account
A business checking account is a valuable tool that can help you manage your business finances more effectively. While it isn’t a requirement to start or run a business, many lenders, including OnDeck, Bank of America and Fundbox won’t approve loan applications for businesses without business checking accounts.
To meet this requirement, simply open a business checking account. If your lender offers a full suite of business banking products and services, consider opening an account to establish a relationship and potentially access discounts.
7. Industry risk
Some lenders don’t want to risk lending to businesses in certain industries due to the odds of failure or unstable revenue. For example, restaurants and real estate businesses may be disqualified from a small business loan.
Research lenders who are familiar with your industry and the associated risks. Many alternative lenders don’t have the same industry restrictions as traditional lenders, so you could be better off going this route. But they often come at a high price due to interest and fees.
8. Don’t have a business plan
Not all lenders require a business plan, but the ones that do want to see a clear and detailed outline of how you’ll use the loan, how it will benefit your business and if your business has the potential to earn the revenue necessary to repay the loan.
Creating a well-thought-out business plan that demonstrates your vision, strategy, goals and financial potential can get you closer to loan approval. A few things to include are:
- Executive summary
- Company description
- Summary of market research
- Financial plan
Why was my SBA loan denied?
Compared to traditional small business loans, SBA loans offer extended terms and reduced interest rates, with average SBA interest rates falling between 10.75 percent and 16.50 percent.
In 2022, SBA approvals for 7(a) loans were under 50,000 and only about 9,000 for 504 loans. That’s according to data from the SBA Weekly Lending Report. When an SBA loan is denied, it could be for similar reasons as traditional loans, but the SBA has additional criteria that businesses may fall short of meeting.
Common reasons for SBA loan application denial include:
- Poor personal or business credit scores
- Insufficient collateral
- Insufficient cash flow
- High existing debt
- Ineligible business, size or industry
- Missing documents or information
If your SBA loan is denied, you’ll need to wait 90 days before reapplying. During that time, check with your lender to see why your SBA loan was denied and make changes or consider applying for a different type of SBA loan.
What to do if your business loan is denied
If your small business loan is denied, this doesn’t mean you won’t get the funding you need. You can reapply for a loan, but there are a few things you’ll want to take care of first.
Start by identifying the reason for the denial. Whether it’s due to poor credit history, insufficient cash flow or another issue, this insight is what you need to get your future loan application approved.
Depending on the reason, for example, if you don’t have a business checking account or business plan, you can be ready to reapply in a few days or weeks. But if your business’s poor financial health is to blame, making improvements may take some time but can lead to a more affordable business loan. But if you can’t wait, consider looking into a different lender that is willing to work with you.
Before you reapply for a small business loan, work to boost your creditworthiness by making timely payments and reducing existing debt. And don’t be afraid to explore alternative lenders and government-backed programs with flexible lending criteria.
Poor credit, insufficient cash flow, lack of a business plan and other issues can prevent you from securing a small business loan. It can be disappointing when you get denied funding, but it’s important to understand why because it’s an opportunity to create a plan and implement solutions to significantly improve your business’s financial health. And, by the time you’re ready to reapply, you’ll seem less risky to lenders and have better odds of approval.
Frequently asked questions
Credit score requirements vary by lender, but you can secure a business loan with a score as low as 500.
Yes, it is possible to get a business loan with no money. Certain business loans, such as SBA microloans, equipment loans and business credit cards, are designed for new businesses with no revenue. But waiting to secure financing might be the better option since some business loans may not come with favorable rates and terms for businesses with no revenue.
Getting a small business loan can be challenging, but it depends on the loan type, lender, their requirements and your qualifications, including credit score and annual revenue. Start by getting your personal and business credit scores and reviewing your credit report. Then look at lenders and their eligibility requirements to see which ones will work with you.