The Top 3 Reasons Why Business Loans Are Declined And What To Do If It Happens To You
Securing a business loan is a common step for entrepreneurs and business owners looking to fuel their growth or manage financial challenges. However, there are instances where loan applications get declined. While this can be disheartening, it’s important to remember that there are alternative paths and strategies to explore.
Assess the Reasons for the Loan Decline:
The first step is to understand why your loan application was declined. Lenders typically provide reasons for the rejection, which could range from insufficient credit history or collateral to high debt-to-income ratios. By identifying the specific factors contributing to the decline, you can more easily develop a targeted approach to address these concerns. The most common reasons for business loan declines are:
- Affordability
If the lender determines that the applicant’s income or predicted income is insufficient to support the loan, it will be declined.
Affordability is primarily assessed by factors such as the business’s cash flow, profitability and debt-to-income ratio. If the lender finds that the business’s current or projected cash flow is insufficient to cover the loan payments, or if the debt-to-income ratio is deemed too high, they may decline the loan application to protect both the borrower and the lender from potential financial strain. Lenders want to ensure that borrowers have a reasonable ability to repay the loan without jeopardising their business’s financial stability.
Businesses that have been declined a loan based on affordability would benefit from a thorough financial assessment. This can determine areas of the business that could be streamlined to increase efficiency and profitability as well as identify costs that could be reduced. - Poor Credit Score
A poor credit score is a common reason for the decline of a business loan application. Lenders use credit scores as a measure of an applicant’s creditworthiness and the likelihood of repayment. A low credit score indicates a history of late payments, defaults, or financial mismanagement, which raises concerns about the borrower’s ability to fulfil their loan obligations.
Lenders rely on credit scores to assess the level of risk involved in lending to a business. A poor credit score can be seen as an indication of higher risk, leading lenders to decline the loan application to protect their interests and mitigate potential losses.
It is essential for businesses to actively work on improving their credit scores to enhance their chances of loan approval in the future. This can be achieved by clearing outstanding debts and making payments in full and on time.
- Insufficient Collateral
Insufficient collateral is another common reason for the decline of a business loan. Collateral serves as a form of security for lenders, providing them with an asset that can be seized and sold in case of loan default. When a business lacks sufficient collateral to back the loan amount, lenders may be hesitant to approve the loan due to the increased risk involved. Insufficient collateral can make it challenging for lenders to recover their funds if the borrower fails to repay.
In order to overcome a decline based on collateral, businesses may need to save up a certain percentage of the loan amount before reapplying or be able to offer a guarantor.
Seek Expert Guidance:
Facing a declined business loan can be discouraging, but it doesn’t have to be the end of your aspirations. By taking proactive steps and seeking guidance from professional business consultants, you can navigate this setback, explore alternative financing options and strengthen your overall business strategy.
At Wisdom Business Consultants, we can assess your financial situation and provide valuable insights and strategies tailored to your unique circumstances. Our friendly team are experienced in a variety of strategies to help businesses overcome financial challenges including business restructuring (formal or informal), debt consolidation and debt negotiation.
Depending on your situation, we may even be able to assist with money lending under variable terms with a quick approval. This also includes Cash Flow Finance, so all your cash flow needs can be taken care of in one place. Our facilities are tailored specifically to fit your business and the unique way in which it works.
For expert advice and assistance navigating your next business loan, contact our friendly team at Wisdom today.
