Knowing why business loans are denied can help you make sure your application has the best odds possible. When applying for a business loan, it is important to present your company as low risk for lenders. We understand that this is not always possible, but repeatedly applying for loans without fixing the underlying issues raises red flags with lenders and further hurts your chances.
Unfortunately, lenders do not have to tell you why they have denied your business loan application. You can ask, but very rarely will they provide specific, useful information. It is up to you, either alone or with the help of a business credit professional, to determine why the loan was denied.
If you have been denied a loan, or simply want to put your best foot forward when applying, review these common reasons business loans are denied.
1. Risk Indicators in Credit Reports
Issues with business credit are not always as simple as having “good” or “bad” credit. Some companies have high debt to limit accounts since they are using credit to operate as they grow. Extensive financial inquiries can make your company look desperate for funds and create a higher risk image to a lender/creditor.
Unlike personal credit, which has the FCRA for consumers to use as leverage in repairing their credit, business credit has very few regulations or mechanisms to help the average business owner.
There are three major business credit bureaus: Experian, Dun & Bradstreet, and Equifax. Additionally, there are many smaller, specialized credit bureaus that may be used. When it comes to pulling the right reports, analyzing credit and developing an action plan, the process can become quite complex. For most business owners, it makes sense to hire a professional to help navigate business credit repair.
Issues with Personal Credit
In some cases, lenders may assess your personal credit when evaluating your business for a loan. Only when personal credit is used for a personal loan do lenders have to supply you with reasons why you were denied and copies of the scores that were used. If personal credit is pulled for the purpose of a business loan the lender does not have to supply you with reasons why you were denied.
If you were denied business financing, whether your personal or business credit was used, or a combination of both, to help make sense of a business loan denial, consult a credit expert like the ones at North Shore Advisory, who have a strong background in both personal and business credit.
2. Too Much Existing Debt
If the debt load of a business is high, it indicates to a lender that the business may not be able to pay back the loan or financing that the lender might offer. You want the debt-to-income ratio to be around 36%. 50% is on the high side, and anything more than that is too much debt.
Business owners should have a clear understanding of the exact amount of debt they have and a plan on how they are paying it back. It is important to prioritize debt based on the cost. Pay back the highest cost debt first and work from there. Too much debt hurts your ability to get financing and your credit ratings.
3. Insufficient Profit or Cashflow
Without adequate profit and cashflow, businesses cannot pay back creditors or lenders, leading to poor credit scores and larger fees and interest on existing financing. Because the risk of default is high, most lenders will not want to extend additional loans to a business that does not generate enough cashflow to pay its monthly debts. While there may be exceptions, risky loans would likely come at such a great cost that they would not be worth pursuing.
To get a loan your business is capable of paying back, and to avoid missed opportunities with potential partners, clients, or investors, maintaining healthy profit and cashflow must be a top priority.
4. Issue with the Type of Business
Some businesses are considered a higher risk than others. For example, the National Restaurant Association estimates a failure rate of 30% for the US restaurant industry. Lenders take into account these types of risks when evaluating business loan applications. If you are in a higher risk industry you might have to work harder to get a loan and the price for that loan might be greater.
5. Current Environment
Depending on the current state of the country, nation, or planet, your business could be considered a high risk. In 2020, the entertainment industry or large party event companies would be high risk to lenders due to the global pandemic. If people are not allowed to gather how could these industries work? At one time, the printing industry was a thriving business but now technology has drastically reduced the need for this type of business. Understanding your business and how it is viewed in the current environment can help you make the best decisions moving forward.
While you may not be able to control the ever-changing landscape in which your business operates, there are still definite steps you can take to put your best foot forward and improve your odds of getting an affordable business loan. Repairing business credit is not easy, but you don’t have to do it alone. Contact the experts at North Shore Advisory for a free consultation to get started.