5 reasons why small businesses are denied loans

It's a worst-case scenario for small business owners: you were counting on getting that company loan, but the lender said no.

What should you do now?

Getting rejected for a business loan can be stressful.

However, just because your application may be rejected, it does not imply that your business is permanently doomed.

The first thing you should do is go over the lender's communication with you about the loan.

Looking at it again, prepared for the "no," you may take in new facts about why your loan was denied.

Otherwise, you might also contact the adviser you worked with at that lender and ask them to explain precisely what you could have done better.

Once you've identified the problems, you may be able to correct your application so that it will be considered by the next potential lender.

That said, here are 5 common reasons small businesses are denied loans.

1. Lack of collateral

Most traditional financial companies consider SMEs a high-risk group.

And more often than not, they require some form of collateral to help guarantee that the loan will be repaid.

This means you need to have something that the lender views as valuable, for example property, vehicles, inventory, saving accounts, accounts receivables etc., and this can be a challenge for SMEs.

After all, you might not own commercial real estate, have products or expensive equipment the lender may sell in order to recoup its money, and so on.

Therefore, it's a good idea to keep detailed records of the value of your assets to show collateral. Collateral can take various forms, and it is possible to utilise personal property or vehicles as collateral for a business loan.

However, before you do so, you might want to reconsider - keep in mind that if you default on the loan, the collateral you used will be lost.

On the other hand, it is possible to obtain a business loan without putting up any assets, (an unsecured business loan), however these tend to have higher interest rates and more conditions that you must meet in order for lenders to take the chance.

2. Not asking for enough money

Sometimes, the more money you ask for, the more likely you are to get it.

Isn't that strange?

The truth is, the cost of servicing small amounts of money for conventional financial institutions isn't worth the trouble.

They prefer to underwrite larger loans because they are more profitable for them.

As such, to ensure that you're not under-funding your capital requirements, go over your financial predictions and business plan.

And if you don't need more than you requested, consider other options such as invoice-based financing or contract-based finance.

3. Adverse litigation

This is also one of the most common reasons for loan applications to be rejected in SMEs.

If the company or business owner has any open litigation that has not been resolved, this can be detrimental.

Most lenders will refuse to underwrite loan applications if there are still pending claims that have yet to be settled.

Except for the fact that a suit is benign, as in a motor vehicle accident that did not result in death and where claims are not substantial, and motor insurance is anticipated to cover any potential expenses.

Because of obvious reasons, if a firm has multiple prior or forthcoming court cases against financial institutions on matters related to credit facility defaults, it will be extremely difficult to obtain any commercial loans.

4. Apathy

As so much of the application process is methodical, it's easy to overlook an inherently emotional component to the application process for a business loan, which is why a large number of applications are turned down.

Too many business owners approach lenders with an apathetic attitude, and simply don't demonstrate why they are a good candidate for a loan, rather than someone else.

You must also project confidence and enthusiasm for your business in order to entice the lender and persuade them to invest.

In order to do this, you must tell an interesting tale about your company that the lender finds compelling.

To put it simply, the more prepared, serious and passionate you come across about your business, the more the lender will have faith in you and approve your loan.

5. Not seeking expert advice

When you apply for a business loan, lenders want to know that you've sought advice from experienced advisers.

For example, accountants or retired business people with experience in your market, as they will know what kind of capital is most important to people within your industry.

Moreover, we also suggest that business owners seek financial assistance from business networking organisations and do research on the websites of prominent alternative lenders, as several have extensive resource sections dedicated to the many different sorts of viable cash and how to prepare for it.

Final considerations

When you apply for small business financing, understanding what information small company lenders need from you is critical so that you can submit the required papers.

Normally, your credit score and history will be weighed heavily, so having excellent credit (typically a credit score of 690 to 850) is advantageous.

Another crucial consideration for business lenders is cash flow: they want to know you have enough money and sales to repay them. The amount of debt you have on your credit report is also significant – the more debt you possess, the more likely it is that you will be denied.

Lastly, lenders are looking for evidence that you have a solid business plan and a blueprint for continual profit to demonstrate that you can repay the loan.

For more information on SME Capital and how we could help, please get in touch today.

Is your business looking for funding? Start your application here.