5 Reasons Why Banks May Reject Your Business Loan Application

Every business small or medium-sized needs funds to meet daily needs and to avail of the opportunity that a market offers. For this reason, many business owners apply for working capital loans from banks. 

But in recent times, getting a “green flag” from a bank for a small business loan has become very difficult. As per an article published in GlobeNewswire, Biz2credit report states that in April 2020, small business loan approval percentage dropped to 8.9%.

Surprised? 

Here are 5 common reasons for a business loan rejection:

1. Low credit score

To get approval for a small business loan, its important that both your business and the applicant must have a good credit score. In case your business is new to the market,  banks will look at your personal credit profile to determine your reliability.

Your credit profile gives a sneak peek into your payment history. In case you have a poor personal credit history, then banks may reject your loan application.

Some of the reasons for a low CIBIL score are:

  • Pending payments;
  • Multiple loans;
  • Poor credit history;
  • Low credit balance.
If you have a low credit score, consider the following steps to brush it:
  • Pay bills and credit repayments on time;
  • Maintain a credit utilization ratio;
  • Get a business credit card.
  1. Furthermore, before applying for a loan, check your score with a reputed credit rating company.

2. Unresolved debt

In case your business has a good amount of unresolved debt, then banks probably will not approve your loan. 

The main point of concern for any bank is repayment. When a bank finds that you are already under so much debt, this surely turns them away.

Clear your debts timely and maintain low credit balances.

3. Inadequate Cash Flow

Before lending a business loan, every bank wants to make sure that you have sufficient funds to manage business expenses and can repay your loan.

But in case you have insufficient cash flow, then there are chances that your request will be turned down. 

Some of the ways to improve your cash flow are:

  • Review your cash flow reports;
  • Maintain proper invoicing;
  • Avoid unnecessary expenses.

4. Insufficient Collateral

Are you applying for a secured business loan, but lack sufficient collateral?

If yes, then there are good chances that your bank will reject your loan application. Many banks or creditors ask for monetary deposits to back up their investments. 

To avoid such a situation, look for other sources of funding that don’t require collateral such as unsecured small business loans

5. Poor business plan

A well-defined business plan determines how long the company will survive in a competitive market. No bank wants to lend a loan to a company that doesn’t have a good strategy for long-term success.

To overcome this challenge, adopt good business strategies to make an effective business plan that even impresses your lenders.

In the end…

Yes, it’s quite disappointing when the bank rejects your loan application due to any of the above-mentioned reasons.

But don’t be disheartened and instead work hard on these points to make sure your business loan gets approval next time.

Looking for financial help to meet your business needs? Get in touch with us at 703-399-1685.