Top Reasons Your Business Loan was Rejected (And What You Can Do About Them)

Apr 28, 2022 | BLOG

Every entrepreneur struggles with finding the right capital. After all, an idea is nothing without the means to implement it. Funding is essential to starting and growing a small business, so it can be quite a blow when your loan application gets rejected.

But don’t worry, rejection isn’t the end. You can always ask your lender to reconsider or look for another financing company.

Common Reasons Business Loans are Rejected

Here are seven common reasons why business loans are rejected and strategies to recover from them.

1. Poor credit score

Did you know that poor credit scores are one of the most common reasons for loan rejection? Even if your company has been in business for a while, your credit score is still the ultimate basis of how reliable you are in paying back your borrowed amount.

What you can do: If you’ve been turned down because of poor credit, the easy but non-compromising fix is studying what contributes to a high business or individual credit score. From there, you can proactively start working toward a better credit number.

2. Weak cash flow

Financing companies want to know if your business has enough cash on hand to fulfill monthly loan payments and rent, wages, inventory, and other expenses. They want to guarantee that you have the adequate cash flow to meet your expenditures, pay down the debt, and leave some money as a safety net in the bank.

Even if you are profitable, many small companies struggle with liquidity. This may be due to advanced payments to suppliers before getting revenue for their goods or services.

What you can do: Inconsistent cash flows, narrow profit margins, or regular seasonal downturns can be a red flag to lenders. So, look for strategies to cut costs or increase sales before requesting a loan.

As a rule of thumb, you should assess your financial management abilities. Use accounting software to produce cash flow forecasts and estimates quickly. Afterward, track your cash flow every week to be on top of things. Don’t allow accounts receivable to go over 60 days past due. 

3. Insufficient collateral

Many conventional lenders demand you put up collateral—an asset you own and have pledged to a financing provider to act as their safety net. If you don’t pay for your debt, your lender will take ownership of your asset. Borrowers who don’t put up collateral are considered bigger risks than those who do.

What you can do: If this is the case, consider unsecured loans as an alternate means of finance. At JK Capital, you don’t need collateral to be considered for a loan, so you won’t lose your personal property even if you default. Even better? JK Capital can handle your application in only five working days.

4. Not enough time in business

If your company is still in its early stages, your credit and cash flow histories may be insufficient to secure a loan. It’s worth noting that merchants don’t always immediately record your transactions to the commercial credit bureaus. When you open an account with a different supplier or a new vendor, be sure that they register your payments so that your company can have a positive credit history.

What you can do: Even if you haven’t been operating in your industry for a significant period, you may have a thriving firm and strong finances. Thus, you simply need to find the perfect lender for your case. When determining where to seek small business loans, consider every possibility. Some lenders don’t require long business experience, so do your research and weigh your options carefully.

5. Too high or too low debt utilization

Creditors often prefer that you use less than 30% of the entire loan. Many lenders will flag your business as “overextended” if you use too much. It makes financers apprehensive that you won’t be able to repay them in time. But this doesn’t mean you should completely abstain from debt.

What you can do: If you haven’t made any loans or never had the chance to use your credit in the past, this might work against your enterprise. Maintain an acceptable debt consumption by keeping track of your entire credit limitations. It includes lines of credit, business credit cards, personal credit cards, and other sources of loans.

6. Poor business performance

Financing providers may be wary of approving debt to enterprises with low income and long break-even points. It undermines the ability of your organization to pay back the loan. 

What you can do: Controlling your credit and increasing your firm’s cash flow can be the solution to your application’s rejection. Ensure that you’ve submitted recent financial accounts so that inaccurate data don’t influence the financing decision.

You may also consider lowering the amount of your asking loan. While this may seem discouraging at first, it may be sufficient to satisfy your company’s demands without placing you under unnecessary financial strain when making loan repayments.

7. Too big or too small a loan

Lenders look at your debt-service ratio to see whether you have the adequate cash flow to pay back your loans. The higher the figure, the healthier your financial capacity is. For a small business loan application, you’ll often need a ratio of at least 1.15. But minimizing your debt to get a better percentage might be harmful. The expense of administering small loans may not be worth it for some lenders. 

What you can do: Check your financial estimates and company strategy. Doing so ensures that you’re not undermining how much money you require. Perhaps, you can also reapply and request a more significant amount.

If you don’t need that much, it’s unnecessary to pressure your business into applying for a lump sum or considerable capital. Instead, look for an alternate finance provider, such as a microlender or an invoice-based financing option that offers smaller loans.

Earn That Loan Approval Today

Research is everything when filing a business loan application. You have to make sure the lender you choose can accommodate your specific loan terms and that you meet their qualifications. Business owners having trouble with bank loans can consider online lending companies. Apply for a business loan from JK Capital for accessible and quick applications.