Are you thinking about getting a business loan and wondering if you can get approved?
The 2016 Small Business Credit Survey (SBCS) included 15,991 U.S. firms and found that 45% applied for financing, 24% were denied, and 60% did not receive all of the funding they sought.
It can be very frustrating to keep getting turned down or to get less than you need.
So, what are the top reasons business loans are denied or underfunded?
Top 5 reasons business loans are denied
According to the 2016 SBCS, here’s why businesses are getting turned down.
1. Insufficient collateral
Collateral is sometimes required to secure a business loan. This can include assets such as buildings, equipment, inventory, and accounts receivable.
Of the businesses surveyed, 49% used business assets to secure their loans, while 37% used personal assets and 9% used portions of their future sales.
Unfortunately, 31% of applicants were denied because their collateral was not enough to justify the full loan amount being requested. If you don’t have sufficient collateral, you can still look into unsecured loan options.
2. Weak business performance
A weak business performance was another issue that caused 31% companies to get denied. It’s important that your business can prove to lenders that you are profitable and likely to repay your loan.
Lenders see signs of a weak performance in your profit and loss statements, tax returns, and other financial reports. If your business isn’t well-established, you may be able to lean on your credit history or assets instead.
3. Low credit score
A low credit score was problematic for 29% of all firms. It is not just your personal score either. In order to secure debt, 13% of all firms relied on their business credit score, 42% relied on the owner’s personal credit score, and 45% relied on both.
If your personal or business credit score is low, you will want to work on improving it to not only to get approved but to get lower interest rates. If you can’t wait, you can look for lenders that are more lenient when it comes to creditworthiness.
4. Insufficient credit history
28% of all firms were denied due to insufficient credit history. Without much of a credit history, lenders can’t determine if you can be trusted with a loan.
Typically, they want to see both installment and revolving credit accounts, accounts with several years in length, and accounts with high loan amounts/credit limits that are managed well.
5. Too much existing debt
Too much debt is also a problem and was the reason for 28% of firms getting denied. The more debt you have, the higher the risk for lenders.
One of the top reasons business owners are declined for a loan is because they don’t have the cash flow to support operations or additional debt.”
Yahaira Núñez, Vice President of Business Development and Advisory services at Excelsior Growth Fund, says, “One of the top reasons business owners are declined for a loan is because they don’t have the cash flow to support operations or additional debt.”
To find out where you stand, look at your debt to income ratio. This can be calculated by adding up all of your business and personal debts and dividing the sum by your monthly gross income.
Multiply that by 100, and you will get a percentage. It should be below 36%.
These are the five top reasons that were found to cause a business loan to be denied. However, there are many other requirements that can hold you back. Here are the common ones you should know.
More business loan eligibility factors
Time in Business
How long has your business been in operation? Most lenders look for established businesses that have been in operation for at least one or two years.
Some loans will require that you have skin in the game. In other words, some lenders want to know what you have invested from your own assets toward the company.
The amount of experience you have in your industry can play a role, as more expertise increases the odds of you being successful in your endeavor.
Applicants need to ensure they apply with a lender that serves their area.
Most lenders will check the amount you make per year.
Income over the previous 90 days
In addition to annual revenue, some lenders will look at income over the past three months. This gives a recent snapshot of the business’s health and performance.
The industry you operate in is another concern. Some lenders limit which industries they will lend to, so be sure to check. For example, OnDeck won’t lend to financial service and investment companies, funeral services, mining companies, and several others.
Purpose of loan
The purpose of the loan may also be of concern to the lender. Many will ask what the funds will be used for and will decide if they want to approve the loan for that reason.
The most helpful piece of advice I got, and what helped my business close a $200k line of credit, was to only talk to potential lenders about what we were going to continue doing (that had worked in the past) and how the debt would be used for those things.”
Matt Fiedler, Cofounder and CEO of VinylMe Please, says, “The most helpful piece of advice I got, and what helped my business close a $200k line of credit, was to only talk to potential lenders about what we were going to continue doing (that had worked in the past) and how the debt would be used for those things.”
He adds, “It’s an easier conversation than trying to sell the long-term vision and potential of your company, which may be different than who/where/what you are today.
Debtors have a low-risk tolerance, and they don’t necessarily want to fund uncertainty or change. They want to know what is working and know that their money is going to fund those things. ”
Some lenders will want to see your business plan, complete with financial projections, profit and loss statements, a balance sheet, and cash flow.
Bryan Doxford, Chief Lending Officer at Excelsior Growth Fund, says “Qualifying for a loan varies lender to lender, but in general, a business owner should have a strong business plan and a proven ability to repay business debts.”
Business financial statements
If your business has more than one owner with at least a 20% stake in the company, many lenders will require signed financial statements.
Lenders may also want you to submit your legal documents, such as your articles of incorporation, franchise agreements, business licenses, business registrations, commercial leases, etc.
Companies will vary in their requirements, so you will want to check with the specific one you are interested in before applying to ensure you are eligible. If you aren’t, you can take note of the things you need to do and make a plan to become eligible in the future.
FAQ quick guide: How to get approved for a business loan
Here are a few business loan topics people commonly ask about.
How to get a startup business loan
SBA loans are a good option to look into as they will extend loans to start-ups. Online lenders often require one to two years in business.
How to get a business loan with bad credit
Bad credit is one of the top reasons business loans are denied. However, there are some lenders that are more willing to work with people who have poor credit.
How to get a business loan to buy an existing business
SBA loans can be used for the acquisition of a business. Additionally, loans from credit unions and banks may work. Beyond that, you will likely have to look into other forms of financing such as a home equity loan, personal loan, or seller-financing.
How to get a business loan without collateral
Insufficient collateral is a top reason business loans are denied. However, there are lenders that will approve loans based on a personal guarantee. You will likely have to have a strong credit profile, business history, etc.
Browse unsecured business loans by clicking here and checking the box in the left-hand menu for “Unsecured term loans.”
How to get a small business loan with bad credit and no collateral
Here is where it gets tricky. Unsecured business loans will rely on your credit to secure a loan, so your choices will be limited if your credit is poor. However, you may still be able to get approved.
OnDeck has a minimum personal credit score requirement of 500 and offers unsecured loans. You will need at least $100,000 in annual revenue and one year in business.
If your business income runs through PayPal, you may qualify for an unsecured working capital loan which doesn’t even require a credit check. So there are options, although your cost to borrow will be higher.
How to get a small business grant
A grant is an amount of money you are awarded that you don’t have to pay back. They are offered by the federal, state and regional governments, corporations, and other organizations. You will need to find grants you qualify for, apply, and cross your fingers that you are chosen.
Find the right business loan for you
A range of opportunities exists for business owners looking to get funding. From large banks to small credit unions and unsecured loans to government-backed ones, there are plenty of options.
The bottom line is that you need to find the best fit for your situation. The better your credit and more established your business, the easier it will be. However, don’t lose hope if you are just trying to start up or have bad credit. You may still be able to find a solution, or at least figure out what you need to do to get approved in the future.
To compare business loan companies now, click here. You’ll be able to filter the results by your credit score, company type, business revenue, years in business, and more.
Additionally, you can read real user ratings from business owners who have borrowed from the companies in the past. We’ll help you identify your options and find the best fit for your budding business.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.