8 Reasons Why Your Business Loan Was Rejected And What To Do

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It's never a good feeling to be rejected, especially regarding your business loan. But don't worry. You're not alone. According to a recent study by the Small Business Administration (SBA), about 30% of small businesses are denied financing. 

So why exactly were you rejected? There could be several reasons, and this article lists some of the most common. If one or more of these reasons apply to you, don't despair! 

There are still options available to you and ways to improve your chances of getting approved for a loan next time. Read on to find out what you can do.

Not using the loan for a permissible purpose

As a business owner, you may need funds to improve an existing product or service, develop new ones, increase operations, pay taxes, or acquire inventory. Still, if the lender isn't satisfied with your plan to use the loan money, it won't accept you. 

Business Loan Was Rejected

There are also certain types of loans that are strictly intended for a particular purpose. 

Research the internet where you may understand the different types of loans and what their permissible purposes are. You may also get an insight into the difference between PPP loans and ERC and what you can use them for. 

PPP loans are commonly used to cover payroll costs, while ERCs can be used for other expenses such as rent or mortgage payments. Knowing the permissible uses of a loan beforehand will help you ensure your plan is viable and increase your chances of being approved. 

Fortunately, options are available if this occurs -- it's essential to understand why your loan was rejected and alter your strategy accordingly. Enlist help from knowledgeable people during the process and research alternative financing opportunities if necessary. Once you're better informed about what lenders expect from prospective borrowers, you will have a better chance of being successful in obtaining the funds you need for your business operations.

Asking for too much money

It can be challenging to face rejection, especially after applying and hoping for that business loan. You are likely now wondering what to do. 

Asking for too much money

Well, it may sound counter-intuitive, but the best first step is to honestly examine why your loan was rejected, most likely due to asking for too much money. 

Evaluate the situation from both sides – yours and that of the lender – then consider how you could better make a case for the money you need. Perhaps it requires a more detailed plan of how that capital will be used, scaling back your request amount, or even restructuring your debt repayment period.

In any case, remain open-minded and flexible in finding solutions to obtaining the resources necessary for running a successful business.

Lack of a detailed business plan

Starting a business is no easy task, and writing a comprehensive business plan is just one part of that process. It can be a daunting prospect; unfortunately, many aspiring entrepreneurs don't understand why it's essential and necessary.

If an entrepreneur has applied for a business loan only to have it rejected due to a lack of a detailed business plan, now is the time to take action.

First, sit down and take inventory of your reasons for starting the business in the first place. What products or services will you be providing? What needs do they fulfill within the market? Once you've got that crystal clear, start researching similar businesses in your industry. 

This will help you determine what strategies are needed to succeed while giving you ideas to create your unique approach. With the solid groundwork laid out, the actual task of assembling all those pieces into a solid business plan that hits all the points potential lenders will be looking for when evaluating your application - and this time, hopefully, with success.

Unrealistic financial projections

Entrepreneurs must familiarize themselves with the financial and budgeting requirements of lenders. 

Graphic representations of projected cash flow, expenses, and profits should realistically assess market trends, sales histories, and even outside influences such as, for example, changes in tariffs or the economy. 

To help you create more realistic projections for future loans, examine why your unusual projections were deemed unrealistic by the lender. Review your current market conditions and research how those might affect your ability to generate and sustain revenue over time. 

Additionally, consult with an accountant or bookkeeper familiar with small business finance to review your figures before going back to the bank for another loan application.

The lender doesn't understand your business model

When a lender rejects your business loan, it may be that they don't agree with the idea or understand the business model, but that doesn't mean you should give up on your venture.

The lender doesn't understand your business model

There are many alternative options you can try that may prove more successful. You can look into peer-to-peer lending platforms, where lenders buy into specific projects in exchange for a financial earnings-share agreement. Or perhaps crowdsourcing could be a potential solution to finding capital from private investors or public donations. Doing thorough research into all the available options is essential before settling on one. E

ven if traditional finance doesn't work out for you, plenty of other paths are known for taking your business idea forward.

Not enough collateral

Getting a business loan can be challenging - especially without the necessary collateral. Some of the collateral that lenders often accept are personal assets such as cars, homes, investments, and savings accounts. If you don't have any of those assets to offer, consider offering something else, such as inventory or equipment.

Many lenders will accept these items as collateral in exchange for a loan. Although it can be disheartening to be rejected, other options are available to fund your small business. In this case, research online lenders who may not require collateral or even those that acquire equity in exchange for the loan.

Additionally, reaching out to local banks in your area might be helpful, as they may be more willing to offer unsecured loans with customized terms and rates. Lastly, family or friends could provide an excellent opportunity, too, since they may not ask for repayment until the business is profitable.

With certain aspects of entrepreneurship requiring some capital - such as inventory purchases and marketing efforts - finding alternate ways to finance your goals is possible.

Low credit score

Starting a business is an exciting and sometimes stressful adventure - even more so when that business relies on loan applications. Getting financially rejected is no fun.

For many business owners, the dream of expanding their businesses is put on hold when a loan application is denied. Unfortunately, being rejected for a loan due to poor personal credit can throw a major roadblock into an otherwise successful endeavor. 

While it may be discouraging, the best thing to do is keep your head up and take the necessary steps to improve your credit score to secure a loan in the future. You don't have to walk this path alone. Many resources are available with financial advisors and professionals who specialize in helping people build their future success through intelligent money management. Taking these steps proactively will ultimately work towards gaining you access to capital needed for small business growth and prosperity down the line.

If your credit score was low and your loan request was rejected, you still have options for helping to get the money you need. The first step is to check your credit report and evaluate what changes may help improve it. 

This may mean paying down existing debt or resolving any unpaid accounts listed in collections. 

Paying bills on time or adjusting your budget so that more can go towards debt can also help improve a low credit score.

Additionally, there are resources available dedicated to helping small businesses secure alternative funding, such as crowdsourcing or microloans, so don't despair if one loan rejection seems to stand in the way of achieving your business goals. With some patience and research, there will almost certainly be a viable solution that works for you and helps bring your plans to fruition.

Your business is too new

You might feel defeated if your business loan was recently rejected due to insufficient revenue or being too new. However, it doesn't mean you should give up. 

Your business is too new

Other helpful strategies you can use to fundraise for your business include finding investors or applying for grants. 

Grants are especially significant because they don't require repayment, so you won't have to worry about the typical headaches of taking out a loan. Depending on the type of business you have and its goals, specific funding sources may be more viable than others--it's essential to do the research and figure out what makes sense for you. 

Rejection can be tricky, but with the proper planning and creative execution, there are plenty of ways to ensure your business gets everything it needs to succeed. 

Final words

The importance of being thorough when you apply for a business loan from a lender cannot be emphasized enough.

Following the tips listed above on what to do when your business loan is rejected, there will be less room for surprises when reviewing what financing options are available. 

Rest assured that with the right plan and strategy, you'll be able to find a loan that fits your business needs in no time. Good luck!

About the author 

Peter Keszegh

Most people write this part in the third person but I won't. You're at the right place if you want to start or grow your online business. When I'm not busy scaling up my own or other people' businesses, you'll find me trying out new things and discovering new places. Connect with me on Facebook, just let me know how I can help.

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