Applying for a business loan can be a time-intensive and nerve-wracking process, and as such, getting denied can be extremely disappointing. However, having your application rejected doesn’t have to spell the end of your entrepreneurial dreams.
In fact, business loan denials are not all that uncommon in the business world, and just because one lender denies your application does not mean you won't get approval from another. Still, it can understandably be discouraging. This is why it is important to carefully review your financial documents and take the time to learn why a lender has denied you so you can optimize your future applications.
Many business owners never learn why they did not get approved for a loan. In a survey conducted by Nav, nearly a quarter of business owners who were rejected for a loan never understood why.
There are many reasons for business loan rejections, and some of them are more common than others. Equipped with this knowledge, you can revise your application, fixing it for consideration by the next prospective lender. So, here are four common reasons, as well as two surprising reasons why business loans are often rejected:
Common reasons why business loans are rejected
Poor credit score or lack of history
There are dozens of business financing options out there — some lenders require a business credit score while others do not and instead use personal credit, revenue, time in business, or a combination of these and other factors to assess your creditworthiness. For example, Fundbox uses your personal credit score when evaluating your application. But just as good credit history is required to take out a mortgage or get a personal line of credit, it is also a key factor in business loans.
Moreover, if you are running a newer business with little to no established credit history, it can also drastically impact your chances of approval. Therefore, it's beneficial to start building a credit history for your company as early as possible. That said, it is by no means mandatory, and you can still apply for and even be approved for business funding without establishing a business credit score.
Business owners who know and understand their business credit scores are 41 percent more likely to be approved. 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.
Whether your business is newer or more established, it’s always helpful to work on improving your business credit score. Adjusting your payment habits and maintaining healthy credit can increase your score over time, putting you in a better position to secure a business loan.
Underdeveloped business plan
In many cases, a business plan is one of the key components of the application process.
When it comes to creating or updating your business plan for the application, try to look at it from the perspective of the lender. They will want to get a clear understanding of your business model, strategies, and a detailed plan for how the funds will be allocated. Lenders need to weigh the risk of lending to you, and your level of preparation can make all the difference.
If your business plan is ill-prepared or lacks the details or information it needs, it can cause a lender to have second thoughts about your application. Take the time to create a robust business plan to increase your odds of approval.
Your business loan application is only as good as your documentation and eye for detail. A common reason for loan rejection is due to deficient or incomplete applications that fail to provide all of the requested information and documentation. Your documentation is used to determine whether you’ll be able to repay the loan; as such, missing or ill-prepared paperwork does not make a great first impression.
Even if you have an excellent credit history and a well-thought-out business plan, submitting your application without carefully reviewing it to ensure you’ve included all required documents can cause your application to be rejected.
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 may be the reason your business loan application was rejected. 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 or 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.
Surprising reasons why business loans are denied
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 simpler 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.
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 (six weeks or more) to have the UCC filing removed.
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. Yet, running a business without a separate bank account can make it very challenging to get approved for a business loan. A Nav survey found that 70 percent 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 factor 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.
Fortunately, if your business loan is denied for this reason there’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.
If your loan application is denied, know that there are still business funding options out there for you. Explore the reasons you may have been denied and make any necessary changes so you have a better chance of getting approved next time. Unsure what to change? There's no harm in reaching out to the lender and asking them for clarity on what you could have improved, then take the information into consideration on your next application.
Learn more about business funding options that might be available to you in our detailed small business funding guide.
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.