Receiving a rejection letter for a business loan you were counting on can be discouraging. Data from the Small Business Administration (SBA) reveals that nearly 50% of small business loan applications are rejected for a variety of reasons. Understanding the most common reasons banks decline loan applications can be useful for your own business endeavors.
Below are some of the most widely cited reasons why a bank may refuse to extend credit.
1. You applied for the wrong loan product
Some banks may specialize in a certain type of lending or industry. For example, a lender may choose to fund large corporations that reach a certain revenue threshold or carry a specific number of assets. Other banks may fund enterprises in particular industries, such as restaurants, retailers or automotive sectors. For these reasons, avoid submitting loan applications to lenders before you have researched the types of enterprises they have funded in the past. This can inform you of lending trends that may influence the type of lender you want to work with.
2.You do not meet the credit qualifications
Lenders examine your business and personal credit reports and scores carefully in making their decisions. Banks rely on your credit scores to determine the likelihood that you will meet your loan obligations. A poor credit standing or excessive debt makes you appear risky to lenders, which can lead to a loan rejection. In a tight lending environment, it pays to clean up your credit report by making payments to vendors on time and keeping your debt balances low.
3. There are problems with your business plan
Your business plan is a comprehensive set of your business goals and your strategies for meeting them. It includes the particulars of your company, including your cash flow, revenue and growth projections, marketing strategies, management profiles, and the reason you are requesting funding. Lenders will examine your business plan in great detail to determine if your proposal is viable. However, if there are areas of your plan that are not fleshed out in enough detail or your calculations don’t add up, this may be grounds for your loan being rejected. For this reason, review your business plan closely to help ensure you have addressed and explained each element of your company’s plan.
Lenders issue business loans selectively, and knowing your bank and its criteria allows you to be better prepared when you submit your application.
Attending one of the upcoming Dun & Bradstreet Credibility Corp. “Access To Capital: Money To Mainstreet” events can highlight the most pressing challenges business owners face when seeking capital, and the strategies they can implement to overcome these obstacles.