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2 main reasons for denial of business loans

Over the past five years, there has been an increase in sources of business financing in the U.S. Specifically, there has been a proliferation in the alternative loan market that fills the need for business owners who do not have credit (personal or commercial) or the operational capacity to obtain approval for traditional bank financing. Although useful for 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 business more harm than anticipated by restricting and sometimes significantly decreasing free cash flow. Traditional bank financing is still the best option for business owners 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 denial in order to equip business owners with the information necessary to produce and present business loan proposals that are concise, relevant, and objective.

(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 rating systems, the foundation remains the credit report for both consumers and businesses. Not only is it sufficient to know your credit profile, but you must also have valid explanations for any reported issues. Ideally, you want to resolve these issues to the greatest extent possible before submitting your business loan proposal.

Your personal and business credit profile also presents a repayment pattern to the lender and represents a key component in approving the business loan. If credit reports show a pattern of default or non-payment as mostly agreed, then the chances of a business loan being rejected are quite high. One way to improve your payment pattern is to close unnecessary or unused 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 that business owners are organized and focused on their businesses, 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. Often times, loan proposals consist of a phone call or a brief conversation with the lender with nothing in writing. Always provide the lender with a brief report, whether it reveals the loan opportunity or a business plan that includes an explanation of how the loan funds are used and repaid.

Also, describe the financing opportunity as a means to an end. In the past, I have experienced how entrepreneurs only offered plans that revealed how and why funding was needed without going into much more information. To improve your chances of receiving approval, give the banker a complete picture of the impact of financing in both the short and long term.