Running A Business

7 Reasons Small Business Loan Applications Get Rejected or Denied

Oct 28, 2021 • 5 min read
small business loan rejected or denied
Table of Contents

      Listen up, Bootstrappers! According to Federal Reserve surveys, approximately 80% of American small businesses will eventually turn to some form of outside funding, whether to get off the ground, survive down times, or just keep soaring. The most popular types: business loans and business lines of credit

      However, a significant portion of small businesses are rejected when they apply for a small business loan. According to the same Federal Reserve study, 9% of applicants were rejected outright and 12% were approved for a smaller loan than they applied for—amounting to 21% of business loan applicants being denied all or some of the funding they sought.

      Lenders can deny applications for many reasons, most of which revolve around the applicant’s creditworthiness. For example, a lender, especially a traditional lender like a bank, may shy away from lending to a company that is already deep in debt or has never turned a profit after years in business. But concerns about repayment are just one of the reasons why funding applications are denied. There are others, too, including the following 7 common issues why small business loan or funding applications were rejected. If one of these happened to you, never fear: we’ve tacked on thoughts about how to improve and increase your chances for approval when you decide to apply again, too.

      1. Incomplete Application

      Is your application complete? Failing to complete a section, applying with false or erroneous information, or not including the documents required by the lender are all issues that will likely lead to an application being denied or labeled “does not qualify.” While some of the questions and requests might seem redundant or unnecessary, trust us, to a lender, it’s all important.

      How to Fix: Before applying for any loans, gather the necessary documents like your company’s financial documentation (such as bank statements and tax records) as well as your business plan.

      2. Insufficient Business Data

      New businesses and companies that don’t have a solid system of records may be disqualified simply due to a lack of track record, which can make it challenging for a lender to judge creditworthiness. If you’re in that situation, lenders may see you as more of a risk.

      How to Fix: Beyond applying again after staying in business for a few years, there are some alternative lending products, like invoice factoring, that approve funding for businesses that have existed for less than a year. 

      3. Low Credit Score

      Both a business owner’s personal credit score and business’ credit score are critical elements of a business financing application. If your credit score is under 660, it may be more challenging to qualify, although options do exist.

      How to Fix: Raising your credit score takes time and effort – for starters, pay down debts and don’t apply for a bunch of credit at once. There is also a growing range of options for small business owners with suboptimal credit. 

      4. Unimpressive Business Plan

      Some lenders, like banks that offer term loans, want to see a company’s business plan and its strategy for growth through future years. These lenders use the plan to judge a business’ creditworthiness for upcoming years and decades.

      How to Fix: Create a detailed business plan according to industry standards. It is best to create several plans based on how your company could be impacted by wider economic factors. Create a best case scenario plan, a status quo plan, and a worst case scenario plan.

      5. Insufficient Collateral

      Some loans require collateral, such as cash, property, or equipment. Being able to offer this collateral can be necessary to complete the application.

      How to Fix: Determine what forms of collateral you are willing to offer in return for a loan. If you don’t have enough collateral, consider lending alternatives that do not have this requirement. Lendio’s application can help you find those, too.

      6. Risky Industries

      Some industries are considered bigger credit risks for lenders, like restaurants, construction, and farming, because of the unpredictability of businesses in these fields.

      How to Fix: To mitigate any bias a lender has about the industry you are working on, ensure your business plan shows steady growth based on data.

      7. Debt Utilization Dangers

      Lenders look at what other sort of loan repayments your business has—this is also a factor for your credit score. If the ratio of “debt you owe” to “credit available” is too high, this may be a red flag for lenders.

      How to Fix: If your debt utilization ratio results in your business loan getting rejected, you should focus on paying down your existing debt. At the same time, you might want to increase your credit line in general, i.e., raise the amount of credit you can access. By doing both, you can improve your debt utilization ratio fastest. 

      If you’ve been turned down for small business financing in the past, consider these tips. And remember, you can apply again with Lendio anytime.


      The information provided in this post does not constitute legal, financial, or tax advice. For specific advice applicable to your business, please contact a professional.
      About the author

      Lendio's team of experts is here to help you with every nook and cranny of your business. We'll make sure you have the best advice for financing, operations, management, hiring, and much more.

      Share Article: