Top 2 Reasons for Denial of Business Loans

Over the last five years, there has been an increase in the sources of business financing in the US. Specifically, the market for alternative loans has proliferated that cover the need of entrepreneurs who do not have the credit (personal or commercial) or the operational capacity to obtain approval for traditional bank financing. While useful in the short term, many of these alternative sources of loans “trap” business owners in loan structures with high payments and abnormally high interest rates. These two factors often cause the company more damage than anticipated by restricting and sometimes significantly diminishing free cash flow. Traditional bank financing continues to be the best option for entrepreneurs due to the low cost of money and the flexibility to mitigate issues with refund and settlement. In this article, we will focus on the top 2 reasons for business loan denials in order to equip business owners with the information to produce and submit business loan proposals that are concise, relevant, and factual.

(1) Unresolved Personal and Business Credit Profile (High Credit Risk)

Most business owners and individuals do not have a solid understanding of their credit profiles. Although banks have become more proprietary in their credit scoring systems, the foundation remains the credit report for both consumers and businesses. Not only is it enough to know your credit profile, but you must also have valid explanations for any reported problems. Ideally, you want to resolve these issues as much as possible before submitting your business loan proposal.

Your personal and business credit profile also presents a payment pattern to the lender and represents a key component in approving the business loan. If credit reports show a pattern of non-payment or non-payment as mostly agreed, then the chances of being denied a business loan are quite high. One way to improve your payment pattern is to close unused or unnecessary lines of credit or decrease existing amounts of credit, such as credit cards, or open lines of credit where applicable.

(2) No business plan equals no test (high management risk)

Lenders like to see business owners organized and focused on their business, and a great way to reveal this is to present a solid business plan. This plan should highlight in the executive summary your business objectives, especially those that include the proposed loan. Loan proposals often consist of a phone call or brief conversation with the lender with nothing in writing. Always provide the lender with a brief statement outlining the loan opportunity or a business plan that includes an explanation of how loan funds are used and repaid.

Also, describe the funding opportunity as a means to an end. In the past, I have experienced entrepreneurs only offering plans that revealed how and why the financing was needed without revealing much else. To improve your chances of getting approved, provide the banker with a complete picture of the financing’s impact in both the short and long term.