4 Surprising Reasons Why You Were Rejected for a Business Loan

Author: Kali Galdis | July 18, 2018

It’s news no business owner wants to hear: you’ve been rejected for financing. For some businesses, that means you’re stuck in limbo, with not enough capital to grow, even though opportunity is there for the taking. For others, lack of financing can mean the end of their business, livelihood, and dream.

The kicker? Many business owners never understand why they didn’t get the loan. In a survey conducted by Nav, nearly a quarter of business owners who were rejected for a loan never understood why.

With consumer financing, lenders are required to explain why an applicant was rejected or given less-than-perfect terms, along with the credit score used in the decision. With business credit, lenders may not be required to provide the reason directly, to put the reason in writing or to furnish the score and report used in the application process. To put it simply, consumer financing applicants get a “Dear John” letter, while business loan applicants could get “ghosted”. (Important note: Not all lenders are equal. Some go above and beyond to help borrowers understand why they were rejected and how to improve their application so they can re-apply.)

Here are some surprisingly common reasons your business financing application may be rejected, and what you can do before you reapply to increase your approval odds.

1. Your Industry Code Is Wrong

If you’ve never pulled your business credit report before, you may not even be aware your business has an assigned code that tells lender, vendors and creditors what industry your company falls in. Some lenders consider entire industries too high risk for lending. Examples include weapons retailers, real estate agencies and “adult” content creators. Your NAICS or SIC code could be the culprit of your rejection.

If it happens to you: Your NAICS or SIC code was likely gathered by the lender via your business credit report. If you think your NAICS/SIC code may be wrong, you can dispute the information with the commercial credit agency. Unfortunately, while you can dispute errors on your consumer credit reports for free, you will need to buy your full report from the business credit agency in order to dispute the items in question.

2. You Don’t Have a Business Credit Score

There are more than 44 different kinds of business financing out there—some require a business credit score while others rely on personal credit, revenue, time in business, or a combination of these and other factors. Business owners who know and understand their business credit scores are 41% more likely to be approved.

If it happens to you: If you’ve never checked your business credit profile, you can purchase a credit report from the three major commercial credit agencies—Experian, Dun & Bradstreet, or Equifax. Business credit agencies are not required to give free annual reports like consumer bureaus. If you have no credit profile, it’s because vendors or lenders haven’t reported any of your payment or account activity. You can call those partners and encourage them to report to the agencies, or open a tradeline or credit card with a vendor that does report.

3. You Have Too Many UCC Filings

When you get approved for a secured business loan, the lender will often file a lien with your state’s Secretary of State to protect their investment. This doesn’t mean they are actively coming after the assets to recoup repayment, but it gives them the right to reclaim the assets if you default on the loan.

In layman’s terms—it’s like calling “dibs” on the collateral or assets so other lenders can’t go after them if you default on multiple loans.

If it happens to you: Many high-profile lenders will not lend to a business unless they are the only lender with a UCC filing on it or they’re in the “first” position. The problem can pop up from time to time when a lender on a loan that’s paid in full forgets to remove the lien filing. It’s surprisingly common and can impact a business’s credit profile for years. Unfortunately, it can take some time (6 weeks or more) to have the UCC filing removed.

4. You Don’t Have a Separate Business Bank Account

It’s such a simple part of starting a business, but many business owners don’t have a separate business checking account. A business without a separate bank account struggles to get approved. A recent Nav survey found that 70% of business owners without a business bank account had been rejected for a loan in the past two years.

Why is this such an essential for business lenders? Two reasons. First, it can be hard for a lender to judge monthly and annual revenues, cash flow and obligations from a personal checking account that contains business and personal expenses. Second, it can be the best way to judge how long a business has been in business, and “time in business” is a common underwriting factor for business loans.

If it happens to you: It’s a pretty simple solution: set one up! There are plenty of low-cost options out there and a business bank account will make your bookkeeping and taxes easier to manage as well.

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Disclaimer: Fundbox and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.

Image credit: Photo by Steve Johnson on Unsplash

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