Top 6 business loan decline reasons

Businesses are declined for business loans for many reasons.   Below are the top 6 business loan decline reasons.   Your business can do several easy things 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.
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:
A.  Spend time researching 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.
B.  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.   The 2nd owner may not even be required.
Longer term solutions:
A. Get a copy of your personal credit report.   Look for errors.   If there are errors, you can dispute them with the credit bureau.  If they are removed, your credit score will go up.  If there is derogatory credit, look at how old it is.   If it is close to 7 years old, it may be on the verge of dropping off your report.    You will then know your credit score will go up once it drops off.   Limited credit may also be an issue.   If you have limited credit, this may be a time to consider what accounts you can add to your credit bureau.

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.
A.  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.     This is sometimes also referred to as negative cash flow or unacceptable cash flow.   Businesses are often declined for a business loan due to insufficient cash flow.   The official decline reason varies, though the basic reason is the same.  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, also referenced as “OD” and Insufficient funds, also called
“NSF” or “NSF’s” happen because of poor cash flow or insufficient cash flow.
How to avoid this decline 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.   A starter line line is usually a small line that the lender offers just to get the relationship stated.   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.   For many types of business loans, financial statements are still required.   This is more often the case when the terms are very favorable.   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.   This is the case for Real Estate backed loans, Accounts receivables financing, or Equipment Loans.   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 product to another.   For some lenders 2 years or more time in business 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.   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?   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.

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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 preparation 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 others to consider besides these top 6 business loan decline reasons.  Others include declines for key financial ratios such as debt to income and declining revenues.   In some cases, the business is approved but not with the terms the business wants to accept .   These reasons are less frequent.  They can be acted on differently.  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.