If you’ve ever applied for a small business loan, you know that the process can be grueling says Tommy Shek. You have to fill out countless forms and provide detailed information about your business finances and plans. The hope is that, after all of this work, you’ll be approved for the loan. But sometimes, despite your best efforts, your loan application is denied.
If this happens to you, don’t despair. There are often reasons why a small business loan is denied that have nothing to do with you or your business. In fact, according to a study by Biz2Credit, 26% of small business loan applications are denied because of factors beyond the borrower’s control.
Of course, there are also some things that you can do to improve your chances of being approved for a loan.
In this article, we’ll discuss both the reasons your loan might be denied and what you can do to increase your chances of approval.
1. Your Personal Credit Score Is Too Low
One of the most common reasons small business loans are denied is because the borrower has a low personal credit score. This is especially common for startup businesses, which often don’t have any business credit history to speak of.
If you’re starting a business, you may not have a business credit score yet. But lenders will still look at your personal credit score to get an idea of how likely you are to repay the loan. So if your personal credit score is low, it could lead to your loan being denied.
There are a few things you can do to improve your personal credit score. First, make sure you’re paying all of your bills on time. This includes both your personal and business expenses explains Tommy Shek. Also, try to keep your balances low and avoid using too much of your available credit. Finally, consider signing up for a credit monitoring service so you can keep track of your credit score and report any errors that may be impacting it.
2. Your Business Credit Score Is Too Low
In addition to looking at your personal credit score, lenders will also look at your business credit score when considering your loan application. Your business credit score is a measure of how likely you are to repay a loan based on your past borrowing history.
If your business doesn’t have a credit history yet, that’s not necessarily a bad thing. However, it can make it more difficult to get approved for a loan. Lenders may be hesitant to approve a loan for a business with no credit history because they don’t have any way of gauging the risk involved.
There are a few things you can do to help build your business credit score. First, make sure you’re paying all of your business expenses on time. This includes things like rent, utilities, and loans. You should also try to keep your balances low and avoid using too much of your available credit. Finally, consider signing up for a business credit monitoring service so you can keep track of your score and report any errors that may be impacting it.
3. You Don’t Have Enough Collateral
Another common reason small business loans are denied is that the borrower doesn’t have enough collateral to secure the loan. Collateral is an asset that can be used to repay the loan if you default on it. The most common type of collateral is real estate, but it can also include things like vehicles, equipment, or inventory says Tommy Shek.
Lenders often require collateral because it gives them a way to recoup their losses if they can’t repay the loan. If you don’t have enough collateral to secure the loan, the lender may be hesitant to approve it.
One way to increase your chances of being approved for a loan is to offer more collateral. This could involve putting up more of your own assets or finding a cosigner who is willing to put up some of their assets.
There are a few reasons why small business loans might be denied. The most common reason is that the borrower has a low personal or business credit score. Another reason is that the borrower doesn’t have enough collateral to secure the loan.
There are a few things you can do to increase your chances of being approved for a loan. First, try to improve your personal and business credit scores. Second, offer more collateral to the lender. Finally, consider finding a cosigner who is willing to guarantee the loan.