The process of applying for a business loan can take a long time and be nerve-wracking, so it can be very disappointing if you are turned down. However, you do not have to give up on your ambitions of becoming an entrepreneur just because your application is turned down.
In point of fact, business loan denials are not unheard of in the industry. However, just because one lender denies your application does not mean that another lender will not approve it. Still, it can be frustrating, which is understandable. In order to make the most of your future applications, it is critical that you carefully review your financial documents and learn why a lender has turned you down.
A lot of business owners never find out why they were turned down for a loan. A survey by Nav found that nearly a quarter of business owners who were turned down for a loan never knew why.
Business loan rejections can occur for a variety of reasons, some of which are more prevalent than others.
With this knowledge, you can improve your application so that the next potential lender will take it into consideration. Therefore, the following are four typical and two unexpected explanations for why business loans are frequently turned down:
There are dozens of business financing options available. Some lenders require a business credit score, while others do not and instead assess your creditworthiness using personal credit, revenue, time in business, or a combination of these and other factors. Poor credit score or lack of history Fundbox, for instance, considers your personal credit score when considering your application. However, a strong credit history is just as important for business loans as it is for obtaining a mortgage or personal line of credit.
In addition, it can have a significant impact on your chances of approval if you run a newer business with little to no credit history. Therefore, it is advantageous for your business to begin establishing a credit history as soon as possible. However, establishing a business credit score is not required, and you can still apply for and be approved for business funding without it.
41% more likely to be approved are business owners who are aware of and understand their business credit scores.
You can purchase a credit report from one of the three major commercial credit agencies, Experian, Dun & Bradstreet, or Equifax, if you have never checked your business credit profile.
It never hurts to work on raising your business credit score, no matter how old or young your company is. Your credit score can rise over time if you make changes to your payment habits and keep your credit clean. This will help you get a business loan.
Undeveloped business plan A business plan is frequently an essential part of the application process.
Try to approach the creation or revision of your business plan for the application from the lender’s point of view. They will want a thorough plan for how the funds will be distributed as well as a clear understanding of your business model and strategies. Your level of preparation can make all the difference in how much risk you pose to lenders when they decide to lend to you.
A lender may reconsider considering your application if your business plan is not well-prepared or contains insufficient information. To increase your chances of approval, take the time to create a solid business plan.
Deficient application Your documentation and attention to detail are only as good as your business loan application.
Deficient or incomplete applications that fail to provide all of the requested information and documentation are a common cause of loan rejection. Your documentation is used to figure out if you can pay back the loan; Consequently, incomplete or missing paperwork does not make a good first impression.
If you submit your application without carefully reviewing it to ensure that you have included all required documents, even if you have a well-thought-out business plan and excellent credit, it may be rejected.
Risky business If you haven’t looked at your company’s credit report in a while, you might not even be aware that your company has a code that tells lenders, vendors, and creditors what industry it is in. Lenders may view entire industries as too risky to lend to. Retailers of weapons, real estate firms, and content creators for “adult” audiences are examples.
Your business loan application may have been rejected due to your NAICS or SIC code. If this occurs to you: The lender probably obtained your NAICS or SIC code from your business credit report. You can dispute the information with the commercial credit agency if you believe that your NAICS or SIC code may be incorrect.
Sadly, you won’t be able to dispute the items in question unless you purchase the full report from the business credit agency, even though you can dispute errors on your consumer credit reports for free.