Editorial Note: We earn a commission on partner links on Forbes Advisor. Commissions do not affect the opinions or ratings of our editors.
When a lender declines your application for a small business loan, it can be disheartening. However, if you are in this situation, you are far from alone.
There are nearly 32 million small businesses in the United States. In 2020, 63% of these businesses did not apply for financing because they feared a lender would deny their request, according to data from the Federal Reserve. Many companies that applied for funding (after March of the same year) were denied (30%) or received only part of the funds requested (26%).
A lender may deny your business loan application for a number of reasons, but you can find out about these red flags ahead of time. Once you understand why lenders are refusing small business loan applications, you can work to resolve these issues ahead of time.
Here are five issues that could keep you from getting a small business loan.
Best Business Credit Cards 2022
Find the best business card for you and identify factors important to your business
1. Bad business credit
One of the most important factors a lender may consider when applying for a small business loan is your credit score and credit report. A survey by the National Small Business Association found that 20% of small business owners refusing financing received denials due to a low credit score.
Your business credit information tells lenders how your business has handled its credit obligations in the past and whether you are likely to pay your debts on time in the future. It’s wise to review your business’s credit reports before applying for a small business loan to make sure they’re in the best possible condition. You can make plans to expand business credit in the future if you don’t like what you find.
2. Bad personal credit
Small businesses are often closely tied to their owners. Therefore, it’s understandable that a lender would want to review how you manage your personal credit to get an idea of how your business might manage its credit obligations. A Goldman Sachs survey found that 70% of small business owners said their personal credit score was an important factor when applying for financing for their business.
A low personal credit score can be a business killer for some business loan applications. You may qualify for a bad credit business loan, but be prepared to pay higher interest rates and fees. In the long run, your best bet is to work on improving your credit for the future.
3. Insufficient time in business
Your time in business can also play a role in your company’s ability to secure a business loan. As a new business, you might be at a disadvantage for two reasons.
- You may not have had enough time to establish good business credit.
- Some lenders will only grant loans if you have been in business for at least six months to two years.
In general, it is easier for an established company to obtain financing than for a startup. But if you need to apply for credit for a new business, you still have options to consider.
There are many start-up business loans available. Just be sure to pay attention to the loan requirements, especially when it comes to time spent in business. You want to avoid applying for small business loans that you don’t qualify for because of the age of your business.
4. Cash Flow Limits
Limited or erratic cash flow can be a red flag when applying for a small business loan. Without sufficient cash flow, your business may struggle to meet monthly payments on new debt.
If you’re having cash flow difficulties, one area you might want to look into is your billing process. Make sure you have a system in place to send invoices immediately, as soon as products or services are delivered to your customers. You might also consider implementing late payment fees for slow payers or more consistent follow-up procedures for invoices that exceed their due dates.
5. Missing documents or information
Business loan applications can be tedious. When you add the mountain of documents required by some lenders, you can start to feel a lot of frustration.
Yet banks and lenders ask for these details for a reason. Each piece of information and documentation helps the lender assess your level of risk and determine if lending money to your business is a good investment. It’s essential to set aside time to go through your loan application line by line and then double check the details when you’re done.
No matter how long it takes, you must track down and provide every tax return, bank statement, business license, and other documents the lender wants to see. If you put in the effort to follow up on every request, you may be able to remove the barriers that prevent you from qualifying.
Alternatives to Business Loans
Many people think of business loans first when they need financing for their business. Yet there are other ways to access capital for your business if you don’t qualify for a business loan.
Business credit cards
If you can’t get a traditional business loan, you may be able to get additional capital for your business with a business credit card. But first, here are a few things to consider before getting a business credit card:
Depending on your situation, a business credit card might not be the perfect alternative to a small business loan. But it can still be a useful tool to have in your business credit arsenal, even alongside other financing options.
If you don’t mind the prospect of extensive research and paperwork, you may be able to get some free money for your business. Small business grants can give your business the financing it needs without any repayment requirements.
You can find lists of available grants from the federal government, state government, and other institutions online. Here are some examples.
- Grants.gov. A useful resource if you are interested in federal government grant opportunities.
- EDA.gov. A directory of state and regional grants and government contracts available from the United States Economic Development Administration.
Grants are an attractive source of funding, but they can be difficult to obtain. To qualify, you will need to find programs that are right for your business. Then you have to beat all other eligible applicants to get the funding. However, if you are successful, grants can provide your business with an influx of cash without worrying about ever having to repay those funds.
Promising start-ups, especially those with the potential to disrupt an established industry, may be able to attract investors. These investors (i.e., venture capitalists, angel investors, etc.) agree to fund a company in exchange for a share of the stock.
With investors, your business doesn’t have to repay the financing like it would repay a loan or other debt. However, the investor may want to own a percentage of the business or receive royalties in return for the investment they make. Make sure you are comfortable selling part of your business and accepting feedback from your new partners before going ahead with this funding approach.
Frequently Asked Questions (FAQ)
What credit rating do you need for a small business loan?
Credit scores affect your ability to qualify for small business loans and help lenders understand your risk as a potential borrower. It is common to see a minimum personal credit score requirement of at least 680 for more favorable loan terms. Business loans with bad credit, by comparison, could be feasible with a minimum score of 530.
Despite the importance of your credit scores during the loan application process, each lender’s business loan requirements vary. A lender will determine the level of credit risk they are comfortable taking on and base their approval criteria on that decision.
What is the easiest small business loan to get?
There is no universally easy small business loan. Still, if you’re trying to weigh different business loan options to find the best fit, the table below provides some interesting insights.
No matter what type of financing you’re looking for, the key to qualifying is finding a loan offer with approval criteria that your business can meet. For example, if you have bad credit, you don’t want to apply for a business loan that requires good or excellent credit. Likewise, if your business has only been in business for six months, you should avoid loans that require a long period of business.
Is it hard to get a business loan?
Getting a business loan can sometimes be difficult. In 2020, 37% of small businesses applied for financing. Of these applicants, 76% received funding, but only 37% qualified for the full amount requested.
If you want to improve your chances of approval, it’s wise to understand the steps to get a business loan before applying for financing. From there, make sure your credit is in good shape, research the best loan option for your situation, review the eligibility criteria, and look for the best deal.
It can take considerable effort to qualify for a good small business loan. Yet, in the end, your hard work could pay off with the financing you need to help your business grow, buy equipment, or solve cash flow problems. The right business loan can be a lifeline or stepping stone to further success.