7 reasons why banks declined your business loan application

However, this doesn’t mean you won’t get any funding at all. It means you’ll have to look outside conventional lenders, for example, grants, online lenders, small business loans offered by the government, and crowdfunding.

5. Existing debt

All debt isn’t bad; however, excessive debt may hinder lenders from extending a loan to your business. This is because they feel you may not be able to repay the money. In fact, lenders want to see a debt-to-income ratio of below 30%.

Anything above this figure will deter interest from the lender. Many startups find themselves in this situation after taking on loans from several sources during their initial phases. This comes back to haunt them when applying for a loan at a conventional bank.

Therefore, it’s in your best interest to pay off existing debts and maintain a low DTI by checking your personal and business credit cards. You can also negotiate with the credit card companies to allow you to pay off the loan at a lower interest rate, allowing you to clear the debt faster.

6. Improper paperwork

This is also one of the leading reasons why lenders turn down loan applications. It’s also the most painful because business owners spend over 20 hours trying to make sure they get everything right, only to be denied in the end.

Some of the documents lenders require include bank account statements, personal and business tax returns going as far back as 3 years, and a business plan. The latter is important to woo investors to open their wallets.

Therefore, it’s crucial to ensure you have a detailed business plan which demonstrates how you intend to grow your business, its mission, it’s target audience, and its sales projections.

7. Unfavorable economic conditions

Your business may have the necessary collateral, a stellar credit, a convincing business plan, and meet all other parameters to qualify for a loan. However, prevailing economic conditions also play a huge role in determining whether the lender will approve your application or not.

For example, a restaurant business may suffer from rejection due to high food prices, which may make pose a danger to its profit margin and, ultimately, its ability to repay a loan.

There’s also the risk factor associated with certain industries such as gambling. Some lenders may decline the invitation to extend credit to such businesses. However, it’s up to you to find lenders who deal with your industry; they do exist.

Alternative options

When a bank and other lenders turn down your application, it doesn’t mean all doors close on you. There are plenty of alternative funding sources you can consider.

*Friends and family – Many businesses started with the help of friends and family. What’s more, this type of loan comes with low-interest rates or none at all. However, you must take care of the relationship by putting all agreements on paper to avoid problems in the future.
*Crowdfunding – This is a new form of sourcing for capital and involves pitching your idea to investors via an internet platform. If they like your idea, they’ll chip in.
*Merchant cash advances – This option allows you to take a cash advance through purchasing a certain amount of future debit/credit card sales. The merchants will then deduct a certain percentage from your sales instead of fixed monthly installments until you clear the whole amount.

It’s always painful to know a lender turned down your loan application. However, you can use this opportunity to learn more about the reason leading to rejection. This will help you prepare for a subsequent application.