5 Common Rejection Reasons for Small Business Loans

If you are a small business owner, you realize the importance of a constant in-flow of cash for keeping your business running and growing. For a small business owner, the most important and accurate indicator of the success of the business is the amount of money available to be invested back into the business.

All business owners would agree to the fact that the money you invest in your business does not have to be your own money. You can always borrow the money in the form of small business loans to fulfil any of the business objectives such as buying office space and investing in machinery.

While applying for a small business loan is an obvious answer for all budding businesses, getting one is not as simple as it sounds. The approval of the business loan depends on a wide variety of factors ranging from the business owner to the type of business and everything in between. If you are thinking of applying for a small business loan, keep in mind that getting your loan request denied is not the end of the road. In fact, it is part of the learning curve where you analyze the reasons behind your loan request getting rejected and making the necessary changes in your application. Below, we list some of the reason why lenders can reject a small business loan application.

1. Incomplete paperwork

The most common reason for getting a loan request delayed or rejected is also the easiest reason to correct. We all understand that applying for a small business loan is a tedious process involving a lot of steps and paperwork. Many times, some part of the application gets overlooked, or irregularities start to creep in while filing out all the forms. An incomplete or inaccurate application will always be rejected, so make sure you thoroughly go through all the documents and paperwork to ensure they are all in right order.

2. Personal credit score

Many small business owners overlook the impact that their personal credit score can have on the small business loan application. Keep in mind that although the loan is taken for a business, it is still a person that is going to repay the amount. If the person responsible for repayment comes across as someone who has difficulties managing their own finances, the lender’s confidence level in that borrower is bound to go down.

3. Loan amount

We can all understand why someone asking for a loan amount way more than what they need or can afford faces rejection. But what if you ask for a very small amount? Chances are, you may still get rejected. Remember that lenders make money on the amount they loan out. If your loan amount is too small, it might be too much work for the lender to loan you money keeping the small earnings in mind.

4. Collateral

Lending money is a very systematic process where risk assessment plays a big role. The more risky a loan application looks, the lesser the chances of that loan application getting approved. One way for a borrower to decrease the risk level is to show the collateral they can put against the loan amount. If you can’t show much, your application may get rejected.

5. Cash flow

You need money to repay the loan so the cash flow your business generates is a great indicator of whether you will be able to pay the loan amount in a timely manner. Many businesses may look great on paper, but their loan applications get rejected because the lender does not see a strong cash flow with respect to the business.

Keep in mind all the reasons why loan applications get rejected, so you can make sure your application falls short on none of the parameters.

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