Reasons behind Rejecting your Application for Small Business Loan

Reasons behind Rejecting your Application for Small Business Loan
Reasons behind Rejecting your Application for Small Business Loan
August 29, 2016

Most small business owners need additional funds from time to time, either to keep the business going or to make some improvements and innovations. If you are a small business owner, chances are there that your loan application has been rejected at least once by now. You may be confused to why this has happened.

Don’t give up just because your application has been rejected

You should know that if your application for a small business loan has been rejected, you are in the majority of small business owners around the globe, and that it is not the time to give up. You need to rethink your strategy, and make some changes.

Read also: Merits and Demerits of Purchase Money and Non-purchase Money Loans in Short Sales

The reasons why small business loans are rejected

Getting approval from your bank can be a very long and tiring process for a small business owner, and sometimes it is not successful, so here are the most common reasons for it:

1. No collateral or not enough collateral

If you applied for a secured business loan and you don’t have sufficient collateral, or you don’t have any, then you can be sure that your application is going to be rejected. This happens because the bank does not want to risk that amount of money if it is not sure you will be able to repay it. If your business goes bankrupt, then the bank can seize your property that you put down as collateral.

2. Your credit is not good enough

Your credit is what shows the bank or the lender how healthy your business and your finances are. Banks often look both at your personal credit and your business credit when you apply for a loan. If your business is new, you simply don’t have the time to have any credit history, so you can be rejected solely on that.

Read also: A Cash Business Loan might Just be Perfect for a Working Capital

3. Your cash flow could be the problem

In case your cash flow is looking bad the bank is going to consider you to be risky and your loan application will be rejected. Because if the bank is looking at your cash flow and they see that you are not making any money, or that you are not able to pay your bills, then how will you be able to pay your monthly loan payments on time, or at all.

4. Banks often decline small loans

Most banks don’t prefer giving small loans, under $100,000, because they don’t profit from them. It takes the bank the same amount of time and money to process all loans, but they make more money on bigger ones.

5. The business plan you have might not be impressive

Chances are that you have made a business plan, but that it simply is not up to the standards of the bank or that it is not realistic. But you can change that by making a better one with more research and more planning. If you work at it you can impress the bank with your business plan.

Read also: What You Never Knew about the Small Business Administration Loans

You can reapply after making a few changes

Now that you know why your loan was probably rejected you can work on the issues at hand and present your company in a better light. Getting your loan rejected is not the end of the road for you, it just means you need to look at things from a different perspective.

Apply at more than one bank

Since the financial crash of 2008, some banks find it risky to give loans to small businesses, so make sure you apply to a few different ones. Or you can consider alternative lending options, like crowd-funding or peer-to-peer lending.

Read also: Looking for Ways to Finance Your Company: Try Asset Based Lending

Article highlights

  • It is a common thing for a small business to need a loan at some point in time.
  • Most small businesses get their loan application rejected at least once.
  • You need to make a few changes if you want to succeed.
  • The loan can be rejected if you don’t have enough collateral.
  • The bank can reject the loan because the business credit does not look good.
  • If the business is new, there is no credit history for the bank to look at.
  • Your cash flow is weak.
  • The loan is not profitable for the bank. So, it has been rejected.
  • Your business plan is not impressive enough.
  • You should consider some alternative lending options.

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