5 Common Reasons Your Small Business Loan Was Denied

Starting a new business is such a challenging and satisfying endeavor. It requires a lot of hard work, determination, and enthusiasm – and of course a great deal of money. Running out of money is one of the major reasons why startups and small businesses fail. Though business owners try to obtain business financing from different lenders, however, only a few of them are lucky to get it.

From cash flow to credit history to collateral, there can be several reasons for your loan application rejection. According to a recent survey by OnDeck, of over 10,000 business loan applicants in the US, 82% were denied financing by their bank.

At Forwardly, we understand the frustration of getting your small business loan application rejected. So if you’re looking to apply for a small business loan and not sure if you will get approved, here are some financial experts approved tips you can take to lessen these risks and to help simplify future loan approval.

Inadequate Cash Flow

Poor cash flow is one of the main causes for the businesses to fail and it is one of the first things lenders look at when deciding on approving a business loan. Lenders want to ensure that you have enough working capital to cover business expenses as well as repay the principal amount and interest. Examine your cash management skills. A fantastic way to keep your cash flow in a good position is to use a cash flow forecasting software like Forwardly that will help you manage the cash flow, generate reports and projections, and help you grow your business with visual forecasts and insights. You can also follow some smart tips to fix your business’ cash flow problems.

Poor Credit Score

Both your personal and business credit scores play a vital role when applying for a business loan. Lenders checks your credit history to make lending decisions and set interest rates. Credit score helps them determine if a business is going to default or pay off the loan.

To build your business creditworthiness, review your credit score, and take steps to improve it. You should make the payments on time, separate your personal and business account, document every spending, spend well under credit limit, and apply for new credit sparingly.

Applied With a Traditional Bank

If you’re a startup or in the business not for long, it will be a bit difficult for you to get a loan from a traditional bank. Since small businesses may have insufficient collateral, consistent cash flow and poor/ lack of credit history, most commercial banks refuse to give loans to them. Following the 2008 recession, traditional banks now have strict lending criteria which a lot of SMEs find it hard to meet.

Fortunately, small businesses have a lot of other options beyond their current bank for business financing. With an online lending marketplace or alternative lenders, you can secure a loan seamlessly for your small business. These lenders use different data to gather your reliability and creditworthiness. They have a simpler qualification process and make quicker approvals and qualifying for flexible funding options. Also, they will help you get better loan terms and interest rate.

Not Enough Time in Business

You may find problem securing the loan if your small business is relatively young. Lenders are usually hesitant to lend to a business that’s hasn’t been operating for a certain time. To ensure repayment, commercial banks confirm whether your business is profitable and have sufficient working capital. Make sure your vendors report your payments whenever you set up an account with them so your business can build up a good credit history.

Even if you haven’t been operating for very long, you still maintain financial stability and grow your small business – you just need to find the right lender for your situation. Consider alternative sources of lending to get the loans for your small business that fits your financing needs. Try exploring online lending marketplace for more options.

Seeking Small Loans

It sounds unreasonable, but if you are not seeking a big enough amount for your small business loan, most banks will not be interested in helping you financially. The reason behind it is very simple, the banks want more profits. The higher the loan amount, the bigger the profit for the bank.

If you don’t need more money, look for alternative financing sources that will provide small loans. Also, you can apply for the microloan programs provided by federal or state governments.

Final Thoughts

It is hard to accept being rejected for a business loan when you need it the most. But remember there are lots of options available to get the financing, you just have to look for one.

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