What are the 6 biggest business loan decline reasons used by lenders?
In this post we will review what loan companies decline for and what you can do about it.
Tips on 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 to avoid defaults and the bank calling the loan due and payable in full.
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. Talk to the lender first and 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.
1. 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.
Get a copy of your business credit report through Dun & Bradstreet and before applying for a business loan. Contact the business credit agencies and dispute incorrect information. The credit agencies will remove information they cannot verify as correct.
3. Insufficient Cash Flow
The lender believes that the business does not have enough recent cash flow to handle the new debt. A Profit and Loss statement showing a negative net income may cause a decline. Overdrafts and NSF’s happen because of poor or insufficient cash flow.
How to avoid this denial reason:
If your business is declined for a drop in recent revenues including month to date, 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. Insufficient Collateral
Some loan products are asset based but the collateral must be satisfactory or the business loan will be declined. This decline reason happens often when a bigger business loan is needed. Lenders will just not issue many unsecured approvals for higher amounts. 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. Less than 6 months time in business is difficult to approve. Brand new businesses with less than 3 months sales have very limited, if any, options.
Some lenders will decline a business just for being in a certain industry. Often business still apply because they don’t know the lender won’t loan to their industry. This is an easy decline to avoid. Put this in the list of questions to ask a lender before applying. For example, do you lend to my type of business? Sometimes lenders have preferred industries that they lend to.
FAQ Frequently asked Questions on top 6 business loan decline reasons
What are the main reasons businesses get declined for loans?
The top reasons businesses get rejected for loans are bad personal credit, net income or sales are too low, not enough collateral, short time in business, industry type, and unacceptable business tax returns or financial statements.
What can our business do after being declined for a loan?
Ask what the main decline reasons were. If it was for credit, ask for any credit bureau and business credit scores the lender has and the scores the lender wanted. For cash flow, collateral or financial information declines, find out the minimum requirements and when you can re-apply.
What can we do after being denied for low cash flow with strong sales?
The lender calculated that based on their criteria, your business does not have enough cash flow after expenses to safely pay their new debt. If your business is about to payoff any current debt or has recent increasing sales, then let the lender know. They may reverse their decision or approve 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.
In summary, the top 6 business loan decline reasons are:
- Derogatory personal credit
- Derogatory business credit
- Insufficient cash flow
- Time in Business
In addition to charge offs, missed payments are considered derogatory business credit. The SBA is another resource available to assist small businesses in all industries prepare for business success. .
Should you worry about all your decline reasons? What are other steps you can take? There are other considerations besides these top 6 business loan decline reasons. For example, declines for key financial ratios such as debt to income and also declining revenues.
as a result, 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.