Why the Bank Denied Your Small Business Loan

January 2019

You need that small business loan, but the bank didn’t approve it. What happened, and what can you do about it?

First, you need to figure out why the loan was denied. Legally, the bank must notify you that the loan was not approved, and explain why. That explanation may not be very detailed, so if you have questions or feel that you met the qualification you may want to follow-up with the lender to get more information.

In general, though, there are some very common reasons why your bank loan application would have been rejected. These include:

1. Low/no credit score

This is a very typical reason for loan applications to be rejected. If you own a smaller business, the bank typically looks at the CEO or one of the business owners personal credit score. If your personal credit is overextended, or you don’t have a high score your loan will likely be rejected. A bank may also look at your business credit score (which is ranked from 1-100, with 75 considered a good score). Some small business owners are unaware that their business has its own credit score.

Review your score and if it is low, begin working on repairing it. Many small businesses rely on their personal credit to launch their business and carry it for the first year or two so it’s not uncommon to carry high debt. Or you may have run into credit problems due to health issues or other personal issues. Assume it will take at least a year to repair your credit, so you may opt to look for a loan from a lender like One Park Financial, which specializes in helping small businesses access working capital.

2: Risky business

Banks tend not to lend money to small businesses that work in industries that are considered high-risk – either the industry is volatile, like restaurants that tend to open and close quickly. Other industries, like adult dating services, nutritional supplements, and travel can be considered risky too, as they have a higher percentage of cancellations/returned products. If you had a difficult time getting a merchant bank account, chances are you’ll have a difficult time getting a traditional bank loan.

3: New business

Traditional bank loans will rarely be approved if your business opened less than a year ago. It takes time to establish credit, and convince lenders that your business has a good chance of surviving. The good news is that there are funding sources that only require 3 months in business to apply for working

capital. Check the qualification requirements before you apply for funding, and look for options with shorter time in business demands – also check the monthly revenue requirements.

4: You don’t have enough debt

Wait, what – you can get turned down for a loan because you’re not in debt? Sounds strange, but it’s true. If you don’t have a history of obtaining and using credit, banks feel that they have no way to gauge how you’ll manage a loan. Lenders like to see that you utilize no more than 60-70% of your available credit, and make payments on time. For a small business, that would mean personal credit cards and lines of credit. If you don’t use credit, or need to rebuild your credit score, you may want to start by obtaining a secured credit card, and use it appropriately – don’t max it out, and pay on time.

5. You don’t have collateral

Traditional lenders will want small business owners to pledge collateral, which will be used to pay the loan if you don’t meet repayment terms. Collateral might include funds in a personal bank account, equipment or property. If you don’t have enough collateral, or collateral that the bank will accept, your loan application will likely be denied. Look for funders who don’t require collateral, but instead offer working capital dependent on your business revenues.

6: Your business experiences seasonal slumps

Banks tend to prefer to lend money to businesses that have a predictable cash flow, and may see seasonal variances as problematic. Other funders will understand that your business dips a bit during particular seasons, and regains a strong cash flow during other times of the year. Funding options such as Merchant Cash Advances may meet your needs, and help you pay back funding in a way that meshes with your cash flow.

7: You didn’t ask for enough

You may feel that asking for less improves your chances of getting approved for a business loan. But banks typically don’t want the hassle of loaning small amounts of money. It takes about the same amount of time to service a big loan as it does a smaller one, and bigger loans are more profitable. You can consider raising the ask amount, or work with lenders who offer smaller amount loans.

8: You don’t have the right documentation

Banks typically ask for a detailed business plan, your financial projections for the term of the loan, the last three-to-five years of your personal and business tax returns, six or more months of your business bank account statements (and, probably, your personal account statements), your personal and business credit scores, and business documents such as contacts, partnership agreements, permits, leases, mortgages and other obligations. They often ask for additional back-up information during the approval process. Figure on spending about 30 hours in total to gather the information. It can be a real burden to a small business owner, who is typically working around the clock to keep the company running. If you don’t have the time to devote to obtaining a bank loan, look for alternative funding sources with shorter approval times and more limited documentation requirements.

What to Do When Your Bank Loan Is Denied

You have two options, either fix the reason for the denial – build your credit score, wait until you’re in business for a year, obtain and utilize credit carefully, etc. – or opt to work with a funding source which requirements that better meet the needs of smaller businesses. One Park Financial works to help owners of small and mid-sized businesses access the working capital that they need to grow. Visit oneparkfinancial.com or call 855.218.8819 to discover the options that make sense for you and your business.