Starting your own business can be very lucrative. That said, there are many different costs to think about and if your enterprise doesn’t take off right away, it may not be easy to cover them all, at least without proper financing. This is particularly true for younger businesses, where it can take a while to make a respectable revenue.
If you’re an inexperienced business owner looking for financing, there’s a chance that your lender will deny your loan application. Keep reading to find out some of the reasons your business loan was rejected.
Reasons Why a Lender Might Reject Your Business Loan Request
Since a business loan can involve a lot of capital and risk for any lenders involved, it can be harder to qualify than a personal loan or credit card. In fact, there are several things that can get your business loan application rejected, such as:
You Don’t Meet The Credit Score Requirements
As a business owner, you have two credit scores. Your personal score ranges from 300 – 900 and showcases your ability to make debt payments on time. As such, many lenders will check your score prior to approving you to see how creditworthy you are. The closer your score is to 900, the better your approval odds will be.
The same rule applies to your business credit score. Bear in mind that you may have several business credit scores on file with all of Canada’s credit bureaus (Dun & Bradstreet, Equifax and TransUnion), which generally range from 0 – 100.
Banks or Credit Unions
If you have a personal credit score from 300 – 600 or a business credit score close to 0, you’ll technically have bad credit. Unfortunately, when you apply for any type of financing with a bank or credit union, your credit score carries a lot of weight. In fact, most financial institutions have strict approval requirements, so you may not qualify for a business loan if your scores show that you’re at risk of defaulting on payments.
However, if you do meet the proper approval requirements, many financial institutions can offer more business financing, better interest rates and more affordable repayment terms than other lending sources, especially if you’re a qualified member. Before you apply, remember that you must be well prepared for the approval process.
Thankfully, there are many private lending companies across Canada that offer business loans with far easier approval requirements. Here, your credit scores may not be as important and your approval chances will be more reliant on other factors, like your revenue, assets, debts and liabilities. Some alternative lenders don’t even check credit during the approval process.
That said, your business loan may still be rejected if you or your business have a terrible credit score or a credit history filled with late payments. If you are approved, it might only be for a smaller loan with a high rate and a shorter term.
Your Time in Business
As mentioned, it can be tough to get approved for a business loan if your enterprise is relatively new or hasn’t yet been financed. Since banks and credit unions have stricter borrowing guidelines, your business may have to be established and might not qualify unless it’s been earning a solid revenue for several years.
Luckily, some alternative lenders are more lenient and won’t reject your business loan request if your company has been operating for at least 3 – 6 months. Nevertheless, your business may still need to be properly licensed and established to qualify for good loan conditions and interest rates.
Your Business Performance
Qualifying for a business loan is about your ability to make payments. So, if your enterprise hasn’t been earning a good cash flow and the results aren’t expected to be better in the future, your chances of approval will decrease. The same can happen if your business isn’t collecting customer payments or invoices on time.
Since your business’s current and projected revenue plays such an important role in your approval odds, as well as your future loan conditions, it might be safer to avoid applying until its financial situation has sufficiently improved. In addition, it’s probably a good idea to start using financial management and invoicing software.
Check out this guide on creating a business invoice.
Your Debt-to-Income Ratio is Too High
Remember, the amount of debt your business is carrying can play a major role in your loan approval chances too. Many lenders won’t even consider you if your business’s debt-to-income ratio exceeds 30% – 35%. This principle will also apply if you’ve already been approved for financing, where using more credit than the suggested limit could lead to your business being overextended and in more danger of defaulting.
Then again, your business loan may also be rejected if your enterprise doesn’t have any debt or credit history at all. A healthy amount of debt can actually be good for your credit and finances, as long as you’re making payments as agreed. If you’d like a good starter product to gain experience, you might want to try managing a responsible amount of debt with a business credit card, line of credit or other lower-risk solution.
Learn how to manage small business debt.
Your Business is in a Risky Industry
There are many industries that some lenders consider too controversial or not profitable enough for your business to be approved, at least for a large loan. This is a particular problem with banks, credit unions and other traditional lenders, where they need to abide by more specific rules before they can finance any business.
For example, while cannabis stores are gradually becoming more common in Canada, our legal marijuana industry is still relatively new and involves a lot of different laws. Although food and beverage services are more widely accepted, it’s extremely hard for these kinds of businesses to succeed, so there may be too much risk involved.
So, if your business is part of a niche industry, it may be better to apply with an alternative lender that’s open to new possibilities.
Your Business Plan Isn’t Viable
When you apply for a business loan, chances are your lender will ask for a copy of your business plan. Essentially, this document should showcase your business’s future goals and financial specifications, including its:
- Current and projected revenue
- Debts, assets and liabilities
- Balance sheets and budgets
- Estimated future costs
- Staffing details (number of employees, salaries, wages, etc.)
If your business plan doesn’t look viable or you don’t present one at all, your approval odds can once again decrease by a huge margin. The clearer and more profitable your plan is, the easier it will be to qualify for a decent business loan.
Asking For Too Much or Too Little Money
Another factor that can play a significant role in your business loan approval chances is the amount of credit you’re asking to borrow. For instance, a large business loan can carry more danger for your lender because it’s harder to pay back. As a result, your business could be approved for an unappealing loan or rejected altogether.
On the other hand, applying for too little credit can be equally detrimental to your approval chances. While some lenders are looking to minimize risk, they still need to maintain their profit margins. So, if the level of risk involved outweighs the amount of money they would make in fees and interest, you may not qualify.
Fortunately, some alternative business lenders can sell you a micro-loan if you just need enough capital to cover smaller expenses. You can also look into crowdfunding, invoice-based financing, angel investors, and small business lines of credit.
Your Loan Application is Incomplete or Has an Error
In the end, your business loan request might be rejected due to a simple mistake. Even a misspelled name, the wrong mailing address or an unfilled section of the application could lead to an undesired outcome. Once again, this is particularly problematic with banks and other prime lenders, where applications can be pretty complicated and take several days or weeks to process.
This is another case where an alternative lender might be a better place to look for a business loan. For example, lenders like SharpShooter typically have much simpler applications that can be completed online in a matter of minutes. If all goes well, your business loan may be approved within days.
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What Can You Do If Your Business Loan Gets Rejected?
If your business loan application gets denied the first time around, don’t get discouraged, because there are a few ways to get better approval odds the next time you apply, including but not restricted to:
- Find Out Why You Were Rejected – Your approval troubles might be easier to solve than you think. Instead of getting frustrated when your loan gets denied, ask the lender why your business wasn’t approved, then work on fixing whatever suggestions they have.
- Offer Collateral – Your business loan may also be rejected if you don’t provide the lender with any collateral to protect their investment, like a business vehicle or piece of real estate. The more value your collateral is, the better the results.
- Improve Your Personal and Business Credit Scores – Don’t forget, your credit scores can make a huge difference for your business loan approval odds. The higher your scores are, the less risky you’ll be considered and the more likely you’ll be to get approved for a large loan with a low rate and affordable term.
- Improve Your Business Cash Flow – Your enterprise’s current and future revenue are probably the most important factors during the approval process. So, if your business is already established, work on increasing your clientele, decreasing your expenses and collecting all payments and invoices on time.
- Consolidate Your Business Debts – As mentioned, your enterprise’s debt-to-income ratio should be no more than 30% – 35%. If you work on paying down your outstanding debts, not only will you and your business be perceived as less risky, your two credit scores will slowly increase.
Worried Your Business Loan Will Be Rejected?
If that’s how you feel, it may be safer to hold off on applying until your business is more well established and earning a decent revenue. Don’t forget to pay off as many debts as possible, improve your credit scores, then draw up a proper budget and business plan to present to your lender. For help finding the best business loans, lending sources and interest rates in your area, check out the Loans Canada website or call us today!