A denial on your business loan can feel like a major setback, especially when you’ve spent time preparing and dreaming about using the funding for your business. But a loan rejection isn’t the end of the road any more than a cavity is a death sentence. Both experiences are painful, but they can lead to more productive habits in the future.
The key is understanding why the lender denied your application and what you can do to improve. Start with a thorough examination of your business to see what part of your financials didn’t align with the lender’s requirements. Once you’ve identified the trouble spot, you can make changes and reapply confidently.
Ready to get your financial examination started? Here are the most common reasons online business loan lenders deny applications and some first aid tips about what you can do to fix them.
Reason #1: Your Credit Score Is Too Low
A low credit score is one of the top reasons loan applications are declined. Lenders use both your personal and business credit scores to gauge your financial reliability. Typically, anything under 600 raises red flags about your ability to repay debt.
However, having a less-than-perfect score doesn’t mean you’re out of options. Many top small business lenders regularly work with businesses with limited or poor scores. These financial experts look at more than your credit history, including cash flow-based evaluations. Applying with a provider who understands your business is more than one number increases your approval chances.
You also can take steps to improve your credit score. It may take a few months to make a difference, but it can also open the door to more favorable terms and higher approval odds. Raise your score by:
- Paying down credit card balances and other revolving debt
- Making consistent, on-time payments
- Catching up past due balances
- Disputing any inaccuracies on your credit reports
- Limiting new debt
Reason #2: Your Business Cash Flow Is Weak
Even if your revenue looks strong on paper, lenders want to see money coming in steadily with enough left over to handle loan payments. Unpredictable or limited cash flow signals to lenders that you’re a risky investment.
Maybe your travel agency earned $250,000 in December, $50,000 in January, and only $30,000 in February. Or your expenses increase when business increases so your profit margin is always small. Lenders may believe you don’t have a lot of wiggle room to repay financing. This is especially true for loans with fixed monthly payments. Lenders may reject your application as a repayment risk.
Here’s how to improve your cash flow before reapplying:
- Cut variable expenses
- Negotiate discounts with vendors
- Restructure existing debt
- Increase pricing or recurring revenue
- Sell existing inventory
- Shorten collection times
- Invoice clients promptly
- Accept additional payment methods
- Offer prepayment or subscription discounts
Cash flow is the backbone of loan repayment. Demonstrating stronger control over your finances can quickly build lender confidence.
Reason #3: Your Documentation Was Incomplete
Lenders need clear, accurate documentation to evaluate your business. If they can’t verify your numbers, they will deny your application. Missing bank statements, tax returns, inconsistent financials, and outdated records are major red flags.
Gather the essential documents and ensure they tell a cohesive story. Typical documentation includes:
- Three to six months of business bank statements
- Profit and loss statements
- Balance sheets
- Business and personal tax returns
- Legal documents like licenses, permits, or incorporation papers
Review these materials with an accountant or financial advisor to update your information and make sure it’s accurate. If you’re applying online, double check the uploaded documents. They should be clearly legible. Before you submit any application, compare your materials with the list of required information. If a previous application was rejected for documentation issues, this is an opportunity to get organized.
Reason #4: You Applied for the Wrong Type of Loan
Sometimes, the issue isn’t your business; it’s the financing product you applied for. A successful loan request has to align with your business’s size, history, structure, and needs. Lenders might reject your application simply because it’s not a fit.
For example, a lender might see the mismatch if you apply for a $250,000 term loan and your business’s annual revenue is $100,000. They will deny this application even if you qualify for a smaller amount. Know your financial limits and apply for products you can afford.
The financing product’s structure might also result in a denial if it conflicts with your business model. Consider a merchant cash advance (MCA) vs a business term loan. Payments on an MCA are a weekly or daily percentage of your credit card sales. Business term loan payments are a set monthly amount. If all your invoices are paid in cash, your business wouldn’t qualify for a merchant cash advance. You’d be rejected because the repayment plan won’t work for your business.
The solution is to match your needs with the right product. Evaluate your loan purpose and financial profile at the start of your loan search. Search online for information about the different products or speak to a lender or financial advisor to help you choose a product that aligns with your goals. The right match increases your approval odds and your satisfaction with the loan.
Reason #5: Your Business Is Too Young
Lenders like to see a proven track record. Most require at least six to 12 months of operating history, and the best terms often go to businesses with more than two years of data. If your business is brand new, it may not have enough financial history to qualify for traditional financing.
Explore alternative lending options instead. Some lenders offer startup loans, while others base their decisions on personal credit and projections. Contact lenders before applying for any products if your business is new. You can also explore funding options like:
- Business credit cards
- Business lines of credit
- Equipment leasing
- Revenue advances
- Private investors
- Friends and family loans
- Crowdfunding
- Personal loans
Be patient. Your eligibility will improve as your business matures. Keep detailed records, maintain solid revenue performance, and revisit funding options once you’ve hit that 6-month milestone.
Steps Towards Approval
A loan rejection stings, but it’s the kind of pain that can direct your attention. Rejection can focus your attention to a specific area of your finances and application.
Start by reviewing the lender’s feedback. Most will offer a reason for denial, but if they don’t, ask. A loan advisor or other financial professional may be able to answer your questions, too.
Then create a checklist of what you need to improve. Follow through with your plan for a couple of months before rushing into another application. Even if it was an easy fix, multiple hard inquiries on your credit can lower your score and make future lenders wary. Give yourself time to heal and get your finances in tip-top shape.
When you’re ready to apply again, consider these best practices:
- Compare multiple lenders, including fintech, online, and banks
- Choose a lender that specializes in your business size or industry
- Look for prequalification tools that don’t trigger a hard credit check
- Work with a loan advisor to select the right financing product
- Review your application with a financial advisor before applying
From Pain to Opportunity
After having your cavity filled, you may realize you need to start flossing more or stop drinking as much soda to avoid more tooth problems. The same is true of a loan rejection. You might need to cut expenses, pay bills on time, eliminate some debt, or organize your documents to avoid more financial problems for your business.
The key is to stay proactive. Understand the problem and fix what you can rather than ignoring the issues. With the proper adjustments to your finances, you turn a denial into an opportunity to build a stronger business and make your next application an easy “yes.”