How to make sure a business loan application is successful
Why was your business loan application denied?
If you have recently applied for a business loan and your application was declined, it may feel insulting or demeaning, but the first thing you need to understand is that it is nothing personal. There are several potential reasons for having a business loan denied.
It is important to note that there are many lenders out there with different lending conditions which means that if you get rejected for a certain reason by one lender, you may get accepted elsewhere because a different lender has different loaning options. There are various options that are available to you in order to improve your chances of getting approved the next time you apply.
There are many reasons as to why you may have had a business loan denied, the good part is that it is not at a lender’s discretion to explain why. Usually, you will receive what’s called an adverse action letter from the lender explaining the reasons why you were rejected for a business loan.
There are usually two main factors that lead to lenders denying business loan applications, these are predominantly problems with credit and problems with income.
Here are some of the reasons you might have had a business loan denied.
Poor credit history
Lenders primarily look at your borrowing history which is reflected through your credit scores. This is because lenders want to know if you are able to pay back the loan, seeing a solid history of borrowing and repaying will put the lenders at ease to know that their loan will be repaid back to them.
However, if you have not borrowed much in the past, your lack of credit history may lead to your loan being declined or if you have experienced complications with repaying loans in the past.
Brief credit history
The length of your credit history is important to show your creditworthiness to lenders. They need to be able to see that you have an established history with credit products. No history does not reflect a good history. No history means nothing to base the fact that you will be a responsible borrower.
If you keep up responsible habits such as consistently paying off your bills with a credit card or any other form of credit, in time your score will reach its full potential. This can help reduce the chances of having a business loan denied.
Bankruptcy
Bankruptcy will affect your credit rating therefore making it quite difficult for you to get a loan from many lenders. It is also against the law to borrow more than £500 from any lender without telling them that you are bankrupt until you are discharged from your bankruptcy.
Insufficient/unverified income
Lenders look at your work, investments, and other sources of income in order to assure them that you will be able to repay the loan. With some loans, lenders are required by law to calculate your ability to repay the loan through your income.
Even if you have a good credit history, if the numbers do not add up in the end, lenders may decline your loan for that reason. Either because you don’t earn enough to repay the loan or your income cannot be verified with the information you have provided.
Debt-to-income ratio
This ratio is the comparison of how much you owe each month to how much you earn. Most lenders use your own debt-to-income ratio in order to determine whether you will be able to handle the repayments after the approval of your loan. You may see your business loan denied if the numbers add up and it looks like your business will not be able to handle any new debts.
Collateral
With some loans, you are able to personally guarantee the loan with your lender by essentially pledging a personal asset as collateral that is valued at the same amount of the loan. If you have a poor or brief credit history as well as no collateral, the chances of getting approved for a loan are much lower.
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Too many credit inquiries
You may think that applying for several loans at once with different companies may increase your chances of getting approved, but think again. When you apply for more than one loan or credit within a short period of time, it negatively impacts your credit rating. There is no limit or rule to determine how much credit you can apply for or the number of applications you wish to make however, there are consequences to your credit rating if you are making multiple applications for credit.
Making multiple loan applications also makes it seem like you are desperate for money which does not sit right with a lot of lenders, the argument is that, if you look like you need the loan so badly, you may struggle to repay it. As this will also reflect badly on your credit rating, it will make it difficult for you to receive credit or loans in the future as with any loan that you apply for, the lender will complete a credit check.
Change in income
The figure on your pay check every month does not affect your credit score. But lenders look at your income to determine whether that income will be sufficient enough to repay the loan. Therefore, affecting your eligibility for certain new credit accounts.
Recent late payments
You may be very responsible when it comes to paying your monthly credit card bills and you may have done it for years, slowly building up your credit score, but you had an off month and out of nowhere you accidentally miss a few payments. Unfortunately this can affect you pretty badly. The higher the score, the harder it falls when something occurs to hurt your credit rating. This, in some cases, can hurt your loan application more than consumers who had poor credit to begin with.
Foreclosure
Usually, for conventional borrowers, there is a waiting period of typically seven years after a foreclosure for the borrower to be eligible for another loan. For mortgage loans, the waiting period is a minimum of three years until you will be able to apply for a mortgage, this is three years from the time that the foreclosure case has completely ended.
Other issues
In some instances, you can have a business loan denied for less obvious reasons. This could include mistakes such as submitting an incomplete application, or perhaps a problem with your business model.
Action Points
- Credit Challenges: Issues with poor credit history, brief credit history, or bankruptcy can lead to loan application denial. Lenders assess your borrowing and repayment history to gauge reliability.
- Income Verification Problems: Insufficient or unverifiable income may result in loan rejection. Lenders need to ensure your income is adequate for loan repayment.
- High Debt-to-Income Ratio: If your monthly debt obligations compared to your income are too high, lenders may doubt your ability to manage additional loan payments.
- Lack of Collateral: For loans requiring collateral, not having sufficient assets to secure the loan can lead to denial.
- Excessive Credit Inquiries: Applying for multiple loans in a short period can negatively impact your credit rating and make you appear desperate for credit, which is a red flag for lenders.
- Income Stability Concerns: Any recent changes in income or employment can affect loan eligibility, as lenders look for stable income for repayment assurance.
- Recent Payment Delinquencies: Late payments, especially recent ones, can significantly impact your credit score and loan application, regardless of a previously good credit standing.
- Foreclosure History: A recent foreclosure can impose a waiting period before you’re eligible for certain types of loans, affecting your loan application.
- Application Errors or Business Model Concerns: Incomplete applications or issues with your business plan can also be reasons for loan denial.
I’ve had a business loan denied – What do I do next?
Having a business loan denied can be disappointing and frustrating but the good news is there are some steps that you can take to get your application reconsidered.
Find out why you were rejected
You need to find out why you were rejected in the first place and also have a lawful right to know. Most lenders will be more than happy to explain why you were rejected and what is required from you to be reconsidered. You have the right to ask the reason behind the rejection within 30-60 days and the lender will be required to inform you the reasons. It is important to note that failure to meet “minimum standards” is not an accepted reason, it has to be a more specific, concrete reason.
It may be a bit soul-crushing reading through a list of why you did not meet a lender’s requirements, but more often than not, it is all about the numbers. The rejection is not personal. You can view the specifics and amend them or change aspects of your lifestyle or business to ensure that next time you will get approved.
Look for errors in your application
You need to thoroughly check through your application, double-check that you have not forgotten to report any source of income or accidentally embellished an additional zero to any numbers.
Review your own credit score
It does not harm your credit score for you to check your own credit. It is a good idea to check in periodically on your credit score to see what is affecting it in a positive or negative way. You are entitled by law to get a free credit report, that way you can see what the banks can see.
Request reconsideration
If you have noticed an error in your application that can be corrected or suspect that you just barely missed the mark to qualify for the loan, it is worth calling the lender to discuss your case. This conversation should be a formal discussion, not you begging to be approved for the loan. How you act affects your image with lenders, go through all the points clearly that you have to get your loan reconsidered and accept whatever their response may be.
In conclusion, these steps might help you convince a lender to reverse their decision as well as improve your application. Unfortunately there is no guarantee however, there are other options out there for you.
If you have had your business loan denied or you have concerns over your application, contact us today, Our team can help make sure your loan application has the greatest chance of success. We can also advise you on the best alternative funding options for your business if you cannot secure a bank loan.
Action Plan
- Identify Rejection Reason: Request the specific reason for your loan denial from the lender, as understanding this can guide improvements.
- Review and Correct Application: Double-check your application for accuracy and completeness.
- Assess Your Credit: Check your credit report for errors or areas of improvement.
- Seek Reconsideration: If an error is found or circumstances have changed, formally request a loan reconsideration with the lender.
- Consider Alternatives: If still unsuccessful, explore other funding options suitable for your business needs.
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