5 Reasons Why Small Business Gets Denied for Loans

Last Updated on May 21, 2021 by MoneyVisual

Running a small business is notoriously a challenge especially if the capital is drawn from your own pocket alone. You have to pull out a long string of finances in order to keep your business alive.

However, some startups have come unprepared for business operations, making them rely on economic assistance. In response to this, a lot of financial services such as banks, lending firms, and financing companies are offering secured or unsecured business loans for proprietors to assist them with their financial needs for business operation and expansion.

But not all sectors are given the chance to avail of their business loans, others may be denied for some reason. If you happen to experience certain rejections from the bank, you must be wondering why, but maybe your business is going through one of the following reasons why some businesses may get denied loans.

1. Bad Credit Score

While starting up your small business, make sure to start creating a good credit score for your business to avoid getting denied for business loans in the future. Most banks and other financial services are very particular with credit score review to strictly determine the organization’s capacity to settle a payment.

What does it mean to have a bad credit score?

All your credit transactions are documented from a credit bureau database as a reference for your credit score/history. This means that if you have large-amounting loans and you always miss the payment due dates, there is a tendency that your credit score may drop down as well as your chance of applying for a greater amount of loans.

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2. Limited Collateral

To keep traditional banks and other financial services secured from loans, the debtors are required to provide the equivalent collateral that will cover their loans in case of failure to make a payment. Sometimes, lenders give priorities to the business that can provide them with more collaterals as possible. Thus, the chances of getting denied are high if you only have limited collateral values. Start making investments on collaterals to save your business from rejections to credit.

3. Too Much Debt

Being buried into too much debt is another reason for impending approval for business loans. It’s actually fine to loan a large amount as long as you can meet the payment due. But if a lender sees a record of the unsettled amount of loans, they may doubt your capability of sorting out another debt. And so lenders may also become hesitant to process another loan under your business’ name. Of course, lenders want to make sure that you can settle your accounts before they allow you to avail of another loan.

4. Poor Business Plan

Lenders are very interested to know your reason for loan application. Of course, they will be providing you with capital so they expect that you will use the money for future profitable schemes. Providing your business plan will help them see that you are prepared to execute your advocacies for your business growth.

But you have to provide a killer and attainable business plan to successfully avail your desired loan. Because sometimes, loan applications get denied just because of the poorly-developed business plan. This may contain unnecessary expenditures that don’t really make sense to your business.

5. Small Loans

Requesting for a small amount of loans can be a factor of getting a credit declined. As much as possible, banks prioritize businesses that request for larger credit amount given the fact that banks can earn more profit from them eventually. Try to request greater loans but make sure that you can settle your accounts to avoid bad credit records.

Author Bio

Sarah holds a bachelor’s degree in Communication with expertise in advertising and media marketing. She currently works as a web content contributor for Marketlend Debtor Finance, the first peer-to-peer lender in Australia. What motivates Sarah to keep writing is her passion for providing information to all readers out there.