How To Rebound After Your Small Business Loan Rejection

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Jan. 5 2024, Published 8:10 a.m. ET

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There’s never a shortage of challenges when growing a business, and access to capital is typically one of the hardest ones. According to a survey from the U.S. Chamber of Commerce, 76 percent of small businesses were not only worried about finding money but also concerned that tightening lending standards would make it harder to get a small business loan.

It’s more than just a concern. Reality is, according to the Federal Reserve nearly half of banks imposed stricter small business loan requirements, and many companies did not get the small business loan they applied for.

Why lenders reject small business loan applications:

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But things are looking up. So, if you applied for a small business loan—and were denied, this may be the perfect time to try again. However, before you do, let’s look at some common reasons banks don’t approve loan applications.

Poor credit history: When applying for a small business loan, lenders look closely at the borrower’s creditworthiness. If there’s a history of late payments, defaults, or bankruptcy; it likely will lessen the chance of getting a small business loan.

Insufficient collateral: Many lenders require businesses to put up collateral to secure the loan. The loan may be denied if the company lacks the assets to serve as collateral.

Inadequate cash flow: Lenders look for businesses with consistent cash flow to ensure they can repay the loan.

Limited business history: New businesses, especially startups, typically find it harder to get approved for a loan due to their limited operational history. Lenders often prefer companies with a proven track record of profitability and stability, making it even more challenging to get a small business startup loan.

High debt-to-income ratio: Businesses with a high level of existing debt in relation to income are viewed as riskier investments by lenders.

Personal guarantees: Sometimes, lenders require borrowers to personally guarantee the loan. The loan may be rejected if the borrower won’t—or can’t guarantee it.

Other reasons a lender may reject your loan application include a lack of clear purpose for the loan, an unrealistic business plan, being in a risky industry and market conditions.

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Essentially, this all boils down to key questions: Can you and will you repay the loan?

How To Get A Business Loan

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Being rejected for a small business loan can be frustrating, but it’s not the end of the road. There are several things you can do to improve your chances of getting approved next time:

Analyze the reason for the rejection to understand why your loan application was denied. The lender should provide an explanation in writing, or you can contact them directly and ask for clarification. Once you know the reason, you can address it and improve your application for the next time.

No matter what the reason, you should also:

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Review your financial statements, which must be accurate and up to date as well as your business plan. Today, many small business owners think they do not need a strong business plan—but that’s not true, especially if you want to raise money or apply for a small business loan. Your business plan should clearly explain your business model, financial projections, your team’s strength and your growth plans.

You can also check the SBA Lender Match tool to find a list of small business lenders.

The Importance Of A Strong Credit Score

One of the most important factors lenders look at when deciding if you meet their small business loan requirements is your personal and business credit scores.

Range of Personal credit scores: 300 to 850.

Range of Business credit scores: 0 to 300.

The National Banker’s Association says, “Improving [your] credit scores leads to better access to loans and lower interest rates.” The Federal Reserve found that taking financial education programs “positively impacted participants’ credit scores.”

Therefore, what credit score should you aim for? Bankrate says that while each lender has its own minimum credit score requirements, some general guidelines exist for the scores needed to qualify for a small business loan.

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Based On Personal Credit Scores:

Banks and credit unions: minimum 680; scores of 740 or higher obtain better loan terms.

Small Business Association (SBA) lenders: minimum 620 to 680.

Online lenders: typically accept lower credit scores but charge higher interest rates.

Term loans: minimum 670; around 500 for online lenders.

Business line of credit: minimum 670; 580 for online lenders.

Commercial real estate: minimum 680.

Equipment loan: 550, since the equipment secures the loan.

Build a relationship with a small business banker:

One of the smartest things you can do to increase your chances of getting a small business loan is to establish a relationship with a banker.

Tips For Finding The Right Lender:

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Source: Pexels

Research potential banks:

Look for banks specializing in small business loans.

Read online reviews and compare interest rates.

Attend local business events and chamber of commerce meetings to meet bankers.

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When you meet a lender, ask specific questions:

What experience do you have working with small businesses?

What types of loans do you offer?

What are the interest rates and fees?

What is the loan approval process?

How often will I meet with you? Compare that with the level of service you expect (regular check-ins, financial advice, etc.)

What resources do you offer small businesses?

Obtain referrals:

Talk to other small business owners in your industry.

Check with your trade association.

Ask your accountant or lawyer for recommendations.

Interview at least three lenders. This gives you a chance to compare their qualifications and personalities.

Ask questions to get a feel for their expertise and ability to communicate.

You do not have to go through this process alone. Seeking guidance from a SCORE mentor can be invaluable. They can help you understand why your loan got rejected and offer expert advice on strengthening your business.

Most importantly, do not give up. Use your rejection as an opportunity to learn how to increase your chances for approval for the next time you apply for a small business loan.

This article originally appeared on Score.

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By: Score

Since 1964, SCORE has helped more than 10 million aspiring entrepreneurs. Each year, SCORE’s 10,000 volunteer business experts provide 350,000+ free small business mentoring sessions, workshops and educational services to clients in 300 chapters nationwide. In 2016, SCORE volunteers provided 2.2+ million hours to help create more than 55,000 small businesses and 130,000 jobs. For more information about starting or operating a small business, visit SCORE at Follow @SCOREMentors on Facebook and Twitter for the latest small business news and updates.

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