Top 6 business loan decline reasons

This article will focus on the top 6 business loan decline reasons and several easy things you can do to prevent many of these declines.   Use the following list to increase your chances of getting approved for a business loan by avoiding the decline reasons listed.

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Don’t let your business get turned down for any of these top 6 business loan decline reasons.

1. Derogatory Personal Credit

Poor, damaged, or delinquent personal credit  of the owner is the main reason for being turned down for a business loan.  Most businesses are less than 35 employees and the personal credit of the owner is usually part of the credit review. If the personal credit score of the owner is low, there are some steps that might be taken to minimize the impact.

Short term Solutions:

Research different business loan products  before applying. Try to apply for business loan products that have less scrutiny of the owner’s personal credit.  If possible talk to the lender first.  Find out how much of an impact personal credit has on their business loan product.
If there are multiple owners of a business and one owner has better credit, the owner with the better credit should be the first applicant.   If the owner with the better credit is over 50% owner, the application may be approved without the other owner.   This may prevent a decline for weak credit.

Longer term solutions:

Get a copy of your personal credit report and look for errors.   You can dispute them with the credit bureau and your credit score will go up.  Any derogatory items close to 7 years old may be on the verge of dropping off your report.  If you have limited credit, this may be a time to consider what new accounts you can add to your credit bureau to make it stronger.

2. Derogatory Business Credit

Businesses can have derogatory business credit.   This derogatory business credit may appear on a business credit report.   Examples are State Tax liens, Federal Tax Liens, Suits and Judgements, Past Due Accounts and Collections.

Solutions:

Get a copy of your business credit report through Dun & Bradstreet or Experian Business credit report in advance of applying for a business loan.  If there is incorrect information, the process of correcting it is similar to the process of correcting incorrect credit reported on your personal credit.   Contact the business credit agencies and dispute the incorrect information.   If the business credit agency cannot verify the derogatory credit, it may be removed from your file.

3. Insufficient Cash Flow

The lender believes that the business does not have enough cash flow to handle the new debt.   If the lender is reviewing a P & L, Profit and Loss statement and it is showing a negative net income, that may a decline reason trigger.  Overdrafts and NSF’s happen because of poor or insufficient cash flow.

How to avoid this denial reason:
A.

If your business is declined for this reason, contact the lender to discuss it. There may be alternative solutions.   Your business might be approved for a lower amount.   This can include a starter line that lenders offer just to get the relationship started.   Lenders sometimes do this with borderline decline instances.   They want to take a small risk hoping that the borrower will develop into a good long term customer.

Weak financial statements.

Financial statements are still required for many types of business loans.  If a companies financial statements are weak and show a low net income, decreasing revenues, or other weaknesses, it can easily cause a decline.
How to avoid this decline reason:

4. Collateral

Some loan products are asset based.  In these cases, the collateral must be satisfactory or the business loan will be declined.   Real estate backed loans, accounts receivables financing and equipment loans require acceptable collateral.  Even if the customer has excellent credit and time in business, if the assets do not have enough value or other conditions are not here, they may be declined.

5. Time in Business

The time in business requirement varies from one business loan to another and as much as 2 years or more may be required. Ask the lender if there is a time in business requirement.    If there is, ask if it a hard and fast rule.   For some lenders, if the applicant has other strengths in their profile, it may override the time in business requirement and be approved.

6.Industry.

Some lenders will decline a business just for being in a certain industry.  Often business do now know when applying the lender won’t even loan to their industry.   This is an easy decline to avoid.  Put this in the list of questions to ask a lender before applying.   Do you lend to my type of business?   Sometimes lenders have preferred industries that they lend to.

FAQ Frequently asked Questions on top business loan decline reasons

What are the main reasons businesses get denied for loans?
The top reasons businesses get rejected for loans are: derogatory personal credit, derogatory business credit, insufficient cash flow, lack of collateral, short time in business and industry type.
Why do I keep getting denied for business loans?
Frequent denials for a business loan are in most cases due to bad credit, low sales and profit and not enough collateral. Ask the lender why your business was denied to see if some of the decline reasons are the same. Ask the lender if there is anything you can do to change the decline to an approval.
Our business was declined for credit. Is there anything I can do about it?
Ask if it was for personal credit, business credit or both. Try to get any credit bureau and business credit scores the lender will give you information on. Ask if there are minimum credit scores you did not meet and what those score are. Also ask how long you have to wait if you want to re-apply.
Our business was declined for not having enough revenue or cash flow, but we have good sales. What does that decline reason mean?
The lender determined that based on their criteria, your business does not have enough cash flow after expenses to safely pay the new debt. The lender did a cash flow analysis which may have included a debt to income type ratio. If your business is about to payoff any current debt or is increasing revenues significantly, then let the lender know about this. It may be possible to reverse their decision or get an approval on a lower amount.

Some lenders have industries that the do not considered favored industries.   They may consider your industry as challenged or place it in a more difficult to loan to internal category.   Ask the lender: Is my industry a preferred industry you lend to?

How to correct the business loan decline

Not all of these 6 top business loan decline reasons have to be corrected.   Some cannot be corrected.   The steps that should be taken are on a case by case basis. Every company has different hurdles to being approved for a business loan.

Using some of the tips above and your business can overcome many of these top 6 business loan decline reasons and get critical business capital.

Has your business been declined for a business loan because of derogatory personal credit?
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In summary, the top 6 business loan decline reasons are:

  1. Derogatory personal credit
  2. Derogatory business credit
  3. Insufficient cash flow
  4. Collateral
  5. Time in Business
  6. Industry

There are other excellent resources available to assist small businesses in many different industries prepare for a loan.   The SBA has a 30 minute video session on how to prepare a business loan package.

Should you worry about any more decline reasons?   What are other steps you can take?  There are other considerations besides these top 6 business loan decline reasons.  Others include declines for key financial ratios such as debt to income and declining revenues.

Businesses may get loan terms they don’t want and should consider  Additional action steps in addition to the top 6 business loan decline reasons.

Thank you for visiting this page on overcoming the top 6 business loan decline reasons.