Getting approved for a loan can be challenging for business owners, especially when you need funding to help your small business grow.
Understanding the typical reasons why lenders decline a business loan application can help you avoid getting turned down. Here are eight common reasons lenders may decline an application:
1. Bad or weak credit
It’s no surprise that this is the No. 1 reason lenders turn down a business loan. Lenders look at your business and personal credit to assess how likely you are to repay a loan. A good credit score or FICO score indicates that you’ve prudently managed your financial obligations by making on-time payments, avoiding defaulting on a loan or declaring bankruptcy. A poor credit score means the opposite—you’ve been unable to fulfill your financial obligations. Having good credit makes it easier to obtain a business loan or line of credit, seek business credit from suppliers and enhance your reputation with potential partners, vendors and suppliers. In general, QuickBooks Capital requires a FICO score of 620 or higher to qualify for a business loan.
Most lenders have minimum criteria for annual revenue of your business. The number varies widely from lender to lender, with some requiring anywhere from $10,000 to $30,000 in revenue per month or higher. Alternative or online lenders may require a much lower revenue threshold. For example, QuickBooks Capital generally looks for $50,000 in revenue in the past year.
3. Time in business
Traditional business loans require two to three years of business history and tax returns to be considered. Lenders want to see a solid track record, strong revenues, and experience in the market. For startups, lenders often like to see proof that you’ve had managerial background and/or experience in the same industry. A lender like QuickBooks Capital may be a good option depending on your needs because it has insights into your business based on your QuickBooks history. 60 percent of QuickBooks Capital customers were unlikely to qualify for traditional business loans
4. Limited collateral
Lenders typically aren’t willing to risk lending money to businesses without collateral to back the loan in case it’s not repaid. Collateral is an asset, such as equipment, real estate, or inventory, that can be seized and sold by the lender if you’re unable to make your payments. You can include both business and personal assets as collateral to back your business loan, providing a way for the lender to recover their funding if your business fails. QuickBooks Capital doesn’t require collateral since our business loans are personally guaranteed. This means if your business is unable to repay the loan for any reason, you can personally cover the obligation.
5. Lack of preparation
You need to have your business plan in mind when you seek a loan. If a lender deems the reason for a loan to be unnecessary or frivolous—for example, new office furniture or expensive gifts for customers—you’re unlikely to be approved. Lenders may also require extensive documentation including: prior names you have used, previous addresses, educational and business background, income tax returns, financial statements, bank statements, current contracts and leases, any licenses and permits to operate your business, and legal documents that show what type of business you have—a corporation, limited liability company or sole proprietorship. QuickBooks Capital avoids much of this by considering your QuickBooks history when you apply.
6. Inadequate cash flow each month
Banks want to make sure you have enough cash flow to cover payroll, inventory, rent and your loan payments. This is a challenge for many businesses even if they’re profitable. If you have a weak cash flow, you may need to focus on prompt invoicing, cutting expenses, identifying how to bring in extra cash and creating an emergency fund.
7. Too much existing debt
Lenders are hesitant to extend additional credit if they see a mountain of existing business debt from other loans, lines of credit or credit cards. Before applying for a new loan, focus on paying down existing debt, especially on credit card balances, and work to maintain low balances on any lines of credit.
8. Risky conditions outside of your control
The 2008 recession forced banks to tighten their lending criteria, including small business loans. Sometimes these outside conditions—unrelated to the merits of your loan—can affect a lender’s decision. A few examples include: inflation and increasing costs related to your business, concerns about the local or regional economy, new laws that put pressure on certain businesses, or trends within your market niche.
By knowing and managing to these risks, you can clear the path to funding for your business. QuickBooks Capital loans are designed to streamline the process and improve funding opportunities for small business owners. Our mission is to deliver more credit to people who deserve it, and we achieve this by using data and technology to assess the creditworthy traits in businesses like yours.
We want to hear from you! What do you think?