The bad news – your business loan was declined. Without the necessary funds, you won’t be able to take new opportunities, so your business will stagnate or may even close. Probably you’re wondering what went wrong. What are you missing?
The good news – once you find out where your application failed, you can do something about it. Some simple actions can remediate the situation and ensure you get that business loan next time you apply.
Why was my loan declined? Reasons and Solutions
Reason # 1: You have a relatively new business
If you have a relatively young firm that hasn’t been enough time in business, you probably haven’t built up sufficient business credit and cash flow history needed to obtain a small business loan. Most lenders require at least two years in operations.
Solution: You have three options here. The obvious one: Be patient and wait! Your business simply hasn’t been enough time operating. After two years building credit score and stable, reliable business, you can approach your lender again. Can’t wait that long? It’s totally understandable. Consider this option then: some alternative lenders like Camino Financial require only 9 months in business to apply for a loan. And if you have a start-up that hasn’t even been that long operating, you’re not out of options: find out here how to get startup funding.
Reason # 2: Your type of industry is not eligible for a loan
In other words, it’s not about you; it’s about your industry. Some lenders consider certain industries too risky to be granted a loan. For instance, real estate agencies, non-profit organizations or gambling business usually fall under the category of “risky industries” and may cope with additional effort to get a small business loan.
Solution: It may take some research, but your best bet here is to look for a lender who is specialized in your industry. They will not only approve you: you’ll also receive personalized guidance from knowledgeable industry specialists. Another benefit is that you will get the best terms because your lender understands how to underwrite your business.
Reason # 3: Your loan request is too high
If you’ve requested a large number of financial funds, the lender may be worried that you don’t generate enough income to pay off the loan and cover your everyday business expenses. For this uncertainty, your business loan was declined.
Solution: Do the necessary research to confirm the quantity you need to borrow. A proper business plan should reflect this and the profit you project to obtain from the investment to cover the debt. While you write your business plan, you may discover that you don’t need to borrow that much after all. Then it’s a matter of simply correcting your loan request next time around. But if you are certain that the quantity needed may be too high for most lenders, make sure you can provide collateral (in other words, make sure you are applying for a secured loan). Collateral is a property or other asset (inventory, equipment, a car, or even your house) that a borrower offers as a way for a lender to secure the loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup its losses. While it may be a way to guarantee your loan approval, this route involves some risk for the borrower: don’t forget that if you fail to pay back your loan, you could lose your property.
Lenders like Camino Financial don’t require you to put up collateral. Their business loans range up to $400,000, so if the funds you need don’t exceed this amount, this could be a perfect solution for your business.
Reason # 4: The use of money is not convincing enough
Another reason why your business loan was declined is that your loan application has provided a vague or wrong explanation on the intended use of the financial funds.
Solution: Once again, a good business plan should remediate this. It has to detail the use(s) you intend for the money and the profit you expect to generate from your investment. For example, if you need the loan to buy machinery, include a list of the models you intend to buy along with their prices in the market. Also, include figures that show how each machine can boost your production. We can’t stress enough the importance of being conveniently prepared to apply for a loan. Think of it as some type of exam: your lender is certainly going to evaluate your business in detail. Therefore, you have to be prepared and do “your homework” prior to approach a lender. It may sound intimidating, but the benefits you can get from making the effort well worth it.
Reason # 5: Your personal credit score is low
Your personal credit score is calculated based on your personal finance history, the amount of credit you have borrowed, the number of credit applications and inquiries you have made, the existence of unpaid or overdue loans or credit, and other factors. It’s one of the main business loan requirements. You can learn in this article how your credit score impacts your probabilities of getting your loan approved. If this number was low, it means you don’t manage your personal finances well, and therefore you aren’t reliable for returning your debts.
Solution: Your first step is obvious: if you don’t know your credit score, request it as soon as possible. Getting your credit report is free and easy. Once you know your number, there are a lot of ways to improve it. You can learn here how to boost your credit score by 60 points in 60 days. Also, don’t forget that lenders like Camino Financial extend business loans to borrowers with low credit score.
Reason # 6: Your business credit score is low
Just as you have a personal credit score, your business has a credit score too. Most borrowers are not aware of this and therefore they get their loan application rejected even if they have a solid personal credit score. A business credit score is calculated based on a variety of factors, such as business payment history, company age, company size, outstanding debt, and industry type. If this number was low, it means your business isn’t trustworthy to pay back the borrowed money on time.
Solution: Again, you can boost your business credit score by taking some simple actions. The process can also be faster than you may think. Learn here how to build your business credit quickly. At Camino Financial, your business credit score is not one of the main requirements. They mainly take into consideration your personal credit and global cash flows of your business.
Reason # 7: You have already too much debt
Loan stacking sends a red flag to lenders, who may see this as a sign of your inability to properly manage your debt. If you don’t have other outstanding loans but you use a credit card for your business, your lender will prefer that you are not using more than 30% of the total credit available. High debt utilization on business credit cards or other loans may send the message that you’re overextended which justifiably rises suspicious whether you’ll be able to return the loan.
Solution: You can find ways and strategies to pay off debt quickly. If your credit card utilization is the problem here, you can also learn how to properly use your credit card so it becomes a tool to build credit and not a way to hurt it. Once your debt is under control, it’s time to approach your lender again.
Reason # 8: Weak cash flow
One of the reasons why your business loan was declined may have been poor cash flow. Poor cash flow is when the incoming cash flow is insufficient to meet the outgoing cash flow needs of your business. Cash inflow comes from your sales and borrowed funds. Therefore, when your cash flow is low, lenders aren’t sure you’ll be able to pay your due, along with payroll, rent, and other business expenses.
Solution: First things first: learn to calculate the cash flow of your business. Once you have resolved the cash flow of your business is certainly weak, you can opt for different ways to obtain the needed cash to remediate it. If your capital needs are short-term and limited, business credit cards and lines of credit can provide a flexible way to strengthen your cash flow before applying for a term loan.
Reason # 9: Your business sales are low
Another guaranty that you’re capable of returning the borrowed funds is that your business sales are high. Some lenders require annual sales of $100,000. That way, they are assured that you have a steady income to cover your private and business expenses.
Solution: This may be again a matter of time. Your business needs to be operative for a certain time to create a solid base of customers and stable profits. Some strategies can help you here: working on the different stages of your sales funnel can help you increase your sales. Loss leader pricing is an interesting practice used by many retailers to attract more customers and increase sales quickly. Depending on the nature of your business, a motivated and well-structured sales team can do wonders to boost your sales. Last but not least, knowing your customers (regardless of what type of business you run) is a bullet-proof way to increase your sales.
And don’t forget this: no every lender has the strict requirement of $100,000 in sales. Camino Financial requires $30,000 in annual sales for their microloans and $90,000 for their small business loans.
Reason # 10: Incomplete application or paperwork
A business loan application includes various documentation, like personal and business credit reports, a business plan, business bank account statements, financial statements, and some legal documents, such as licenses, contracts, and leases. It’s easy to get lost a mountain of paperwork or to miss something.
Solution: Get prepared! Before you approach your lender again, make sure you are familiar with the complete list of documents they are going to require. Or even better: go ahead of your lender and prepare a folder or a USB unit containing all your documents conveniently organized. This will surely make an excellent impression on your lender next time around.
The application process at Camino Financial is fast and paperless. It can be made entirely online: you don’t need to print, fax or submit any document. It’s that easy! If you want to learn more, just keep reading.
What else can you do to guarantee your loan approval?
For starters, find out the reason why your business was loan declined. Unfortunately, small business lenders aren’t required to provide you with a written notice explaining the reasons for declining. However, in some cases, they may give that explanation only upon written request.
Therefore, make sure you reach out to your lender for more information if you don’t understand why your application was turned down. You have sixty days to file that request in writing. Discovering the reasons for rejection provides you with significant insights into your mistakes and valuable feedback on how you can improve your application next time. Then, and depending on your specific situation, you can follow any of the tips mentioned above.
Other than that, we strongly recommend you to do the following:
- Learn the business loan requirements ahead of time. We have talked about the importance of knowing and gathering all the documents your lender will ask from you, but there are other general requirements (conditions) that you’ll have to satisfy. Remember these requirements vary broadly from lender to lender. Sometimes it’s just a matter of finding the right lender whose requirements are less strict.
- Open a business bank account now. That way, you’ll provide lenders with insights that you manage your finances responsibly, and that you have a steady cash flow. It’s a child’s play to open an online business bank account, however, if you already have one, learn how to manage your business bank account to get a loan.
- If after much consideration you resolve a business loan is not the right fit for you, opt for an alternative form of financing, like crowdfunding, angel investing or merchant cash advances.
Consider a business loan from Camino Financial
Once you’ve figured out the reasons why your business loan was declined and you’ve fixed any issues, it’s time to apply again for a small business loan. But this time play it smarter! Find a lender that offers more convenient conditions and an easier, faster process. Unlike most financial institutions, Camino Financial has more flexible requirements. Check them below:
- To approve your loan, we mainly take into consideration your personal credit the global cash flows of your business
- To apply for a microloan your business should generate $30,000 in annual sales; to apply for a small business loan, your business should generate $90,000 annually
- Your company should have been operating for just nine months
When you’re ready to apply, these are the only documents you’ll need:
- Your online application
- Electronic authorization to download the last 6 months of banking activity
- Last year of tax returns with reported business income
- Proof of business registration
And here are some benefits that you won’t find in other lenders:
- Camino Financial is open to extending finance to borrowers with bad credit and only ITIN
- You don’t have to provide us with collateral
- We provide a fast and easy application process. Submitting your application takes minutes!
As you can see, if your business loan was declined by another financial institution, it’s not the end of the world. Not only you have options to fix your current situation, but this also gives you the opportunity to find the lender that fits your needs and goals and understands your industry. Camino Financial can be that lender. If you are ready to take the next step, all you have to do to start is submitting your loan application. You will receive an instant response informing you if you have been prequalified. In 24 hours one of our business loan specialists will get in touch with you to guide you through the borrowing process.