As a business owner, if your loan is denied, the first thought is “Why?” It’s helpful to check your loan eligibility before applying. Learn what lenders are looking for and the common reasons for business loan denials.
But how do you get a loan when you keep getting denied? A loan application denied is likely a temporary problem that you can overcome.
A disapproved loan is usually isn’t a permanent “no.” but more of a “not now,” meaning you can try again later.
Preparation is in order. When you learn more about what lenders want to see, you can fix this problem.
Why Was My Loan Denied?
Here are 10 common reasons for a disapproved loan:
- Tax Liens and Judgments
- Business Credit History and Personal FICO Credit Score
- Industry Risk
- Insufficient Operating History
- Cash Flow
- Missing or Incomplete Information
- Too Much Debt
- Insufficient Collateral
- Structural Reasons
Let’s break each down:
If the business or any business owner of the company is in bankruptcy, this is usually an automatic reason for a disapproved loan. Some lenders might lend if bankruptcy protection has been filed and completed (discharged). However, no lenders will lend anything to a situation that involves a bankruptcy in progress of the business or one of its owners.
How Long Does Bankruptcy Stay on My Record?
If you are a business owner applying for a business loan, your personal credit and business credit history are considerations for many lenders. Having a history of personal bankruptcy and/or a business bankruptcy are often the reasons for receiving a “business loan denied” result from the evaluation of your application by a lender.
Personal bankruptcies are filed under either Chapter 7 or Chapter 13 of the bankruptcy laws.
A Chapter 7 bankruptcy filing results in all nonexempt assets being sold by the court-appointed trustee and the proceeds used to pay off creditors. A personal bankruptcy under Chapter 7 stays on your credit history for 10 years after the date of the filing.
A Chapter 13 bankruptcy is a court-supervised process that allows a debtor, who has ongoing income, to pay off creditors over 3-5 years using any disposable income that remains after paying for approved living expenses.
Under this type of bankruptcy filing, a payment plan is created to repay creditors at least the value of the total of all nonexempt assets. The assets aren’t sold. A completed Chapter 13 bankruptcy stays on your credit history for 7 years after the date of the filing.
A business bankruptcy is filed under either Chapter 7 or Chapter 11 of the bankruptcy laws.
A Chapter 7 bankruptcy filing results in the business being closed down and remaining assets liquidated to pay off creditors at some fraction of a dollar.
The alternative bankruptcy filing for a business is under Chapter 11, which is a court-supervised reorganization. A Chapter 11 bankruptcy allows the business to reduce liabilities and reorganize with the court’s approval so that the business can continue to operate.
There is a permanent public record of business bankruptcies. It is possible to get a business loan after bankruptcy, but it is very challenging.
2. Tax Liens and Judgments
A business loan application may be denied if a business has unpaid tax liens or outstanding judgments.
Some lenders work with business owners who have bad credit. These lenders will accept outstanding liens or judgments as long as there is a payment plan in progress, which has been agreed by all parties to pay off the debts and the payments are current.
For those experiencing recent financial problems due to the pandemic, the Internal Revenue Service (IRS) offers programs to defer tax payments.
3. Business Credit History and Personal FICO Credit Score
Having an excellent business credit history and a high personal FICO score is very helpful when qualifying for a business loan.
Business Credit History
Review your business credit history by obtaining your report from the Dun & Bradstreet website. If you don’t already have a D‑U‑N‑S Number, you will need to apply for one before obtaining your credit report.
Personal FICO Credit Score
Personal FICO scores range from 300 to 850. A FICO score above 800 is excellent.
Personal bankruptcy lowers your FICO score significantly. If your credit score was decent, at about 700, before bankruptcy, you could expect it to go down 200 points to 500 when you file for bankruptcy protection. If your score was already lower at roughly 680 or less before bankruptcy, when you file bankruptcy protection, you could expect your score to go down by 130-150 points to about 530-550.
When a bankruptcy is finalized by the court, which is the status of discharged, your “poor” rating credit score of 580 or less can go back up to a ”fair” rating of 580-669 if you work on rebuilding your credit.
Even with a poor credit score, it is possible to get a business loan or a merchant cash advance from lenders who accept a FICO score of 550 for the business owner. You will likely have to pay much higher interest rates or fees to get these loans.
Note it is possible to have a good credit rating but refused loan status for your application if your business doesn’t meet the lender’s other qualifications and requirements.
4. Industry Risk
If a lender rejects a loan application, this may be because of unacceptable loan purposes. It also could be that the business is in an industry category that isn’t acceptable by the lender’s loan underwriting rules.
Examples of businesses that may find it more difficult to get a loan and may have a loan application denied include:
- Cash businesses, such as privately-owned automated teller machines
- Money exchange and transfer services
- Cannabis, alcohol, pornography or gambling
- Off-shore businesses
- Online businesses with significant credit card charge-backs
5. Insufficient Operating History
It may be as simple as a lack of sufficient operating history that causes a “business loan denied” result.
Loan Declined? When Can I Apply Again?
It is best to check loan eligibility before applying to see if the lending criteria include a minimum time for the business to be operating. If this is the case, all you have to do is wait for that amount of time to pass, and then you can re-apply.
Be careful if the lender pulls a full credit report on you personally because each time they do this it will lower your FICO credit score. A “soft” credit report allows the lender to see your credit history without harming your personal FICO score. A lender should only pull a “hard” credit report after committing to making the loan.
6. Cash Flow
Most lenders have a minimum monthly or annual cash flow that they like to see before agreeing to give a business loan. If you check loan eligibility before applying, you will find that the lenders are usually quite explicit about these requirements.
Businesses that are startups, and others that are seasonal, have more challenges getting a business loan because of the cash flow requirements.
7. Missing or Incomplete Information
When applying for a business loan, be sure to fill out the application completely and accurately. If a lender asks for supporting documents, give the lender copies of exactly what is requested. Try to keep the document submissions aligned with the information requested.
For example, if the lender requests the last 3year’s tax returns, give the lender those three years, not the past 5 years. If the business hasn’t been operating for 3 years, include a note that shows the inception date of the business and the tax returns that have been filed since then.
If the business hasn’t filed the required past tax returns on time, it is better to file the late tax returns before requesting a business loan. Pay the taxes due with any interest and penalties or negotiate time to pay them with the IRS.
8. Too Much Debt
If a business already has considerable debt, lenders are reluctant to lend the business more money. One way to avoid this problem is to ask for a consolidation loan that uses some of the loan proceeds to pay down the other debts. This strategy is effective if the new loan is large enough and given at a lower interest rate than the existing debt obligations.
9. Insufficient Collateral
Banks pretty much always require significant collateral for business loans less than $1 million, according to Forbes, citing a Pepperdine University survey.
Alternative lenders, such as those offering merchant cash advances, may use future receivables as collateral and require a minimum level of monthly or annual sales revenues to qualify for a business loan or an advance.
10. Structural Reasons
Other reasons to deny a business loan include company size, insufficient management team, customer concentrations, insufficient personal guarantees, weakening industry sector and general economic conditions.
Business Loans: Some Frequently asked Questions
Why Was My Business Loan Application Denied?
If a lender rejects a loan application, ask them to explain the reasons to improve your chances when you re-apply or seek alternative offers.
What Can I Do If I am Refused a Loan From My Bank?
There is a prudent saying about this: “Banks only lend money when you don’t need it.” Bank financing is possible, but it is the most difficult to achieve. Many businesses are refused a loan from a bank.
If you have three times the loan amount requested on deposit with a bank, the bank will be more likely to give you the loan. However, if you lack sufficient collateral, which is a high multiple of the loan request, the bank may refuse to make the loan. There are plenty of lending alternatives, which are much easier to qualify for than a traditional bank loan.
What Can I Do If My SBA Loan Was Denied?
The Small Business Administration (SBA) guarantees up to 85% of a qualified business loan made by a bank. See the SBA 7a loan program eligibility requirements. SBA loans are attractive because of the current low SBA loan rates.
Unfortunately, 1 in 6 SBA business loans granted from 2006-2015 failed, taking an average of 4.7 years to go into default, according to NerdWallet.
This high default rate is why it is difficult to qualify for an SBA guaranteed loan. The pandemic made matters worse, with many small businesses now unable to pay their SBA loans.
If your SBA loan application is denied, seek alternative financing to get the capital you need for your business.
How Do I Get a Loan When I Keep Getting Denied?
If your business loan application is denied, be sure to ask for more details.
What’s the best question a business owner can ask the lender that denied the loan? It’s this: “What can I do to improve my loan application so I will be approved?”
Then, take the steps necessary to fix the problem. That includes:
- Strengthening your credentials
- Repairing any credit history problems that you can
- Being patient
It also may involve applying for alternative financing.