The Top Three Reasons Lenders Turn Down a Loan Application

Depending upon the study you read, as few as 10 percent of small business owners that approach the bank for a small business loan are successful. Although this is frustrating and it’s easy to harangue the bank about it, even alternative lenders turn down borrowers—and they typically have more relaxed standards than banks regarding credit score, time in business, and other measures.

Having been a small business owner myself, I know how challenging it is to balance financial decisions in a small business. What’s more, having started a couple of small businesses, I know how difficult it is to get a start-up off the ground.

With that in mind, here are three of the top reasons a lender might turn down a small business loan application:

1. You have a bad credit score: I don’t believe that credit score should be the end-all-be-all metric for whether or not a small business loan gets approved, but among other things, a bad credit score can be an indication of a borrowers willingness to meet their obligations or at least their ability to manage the financial affairs of their business. Of course there are often extenuating circumstances that might cause a small business owner to fall behind. In those cases, most lenders (including banks) will take those situations into consideration when evaluating a small business loan proposal.

The reality is a banker wants a credit score of someplace around 720—although there are some small business lenders who will go to around 680. Non-bank alternative lenders are willing to accept lower credit scores if other factors like a healthy cash flow exist, but the lower the credit score the less likely a small business owner will find a lender willing to offer them a small business loan.

2. You’re a start-up: Unfortunately, this is a tough group to finance—particularly if the small business owner has less-than-perfect credit. Many small business owners don’t make it past their second birthday and even fewer live to be five years old. Needless to say, most lenders don’t want to roll the dice on a founder with a poor credit history starting a new business. Most lenders want to see at least two years in business before they take a business owner seriously, and even then it’s a challenge for an owner with a poor credit history.

3. You don’t have any income: Unlike an equity investor who will reap the rewards of their investment when a business is either sold or goes public, the first loan payment will likely be due somewhere around 30 days after a business owner receives the proceeds. In other words, if there isn’t sufficient income to make the loan payments, it’s unlikely the lender will approve the loan.


Even if they need to turn down a borrower, I don’t know any lenders who like saying no. It’s important for small business owners to understand what a lender is going to consider before they give you a loan—and a great idea for a business or a product just isn’t enough.

If you’ve been turned down at the bank, you still have some options. At Lendio, we can help you see what those options are. It’s as simple as answering a couple of questions about your business so we can match you to the right lender for your circumstances and credit profile.

It takes a little cash to change the world.

So what are you waiting for?

About the author

Ty Kiisel
Small business evangelist and veteran of over 30 years in the trenches of Main Street business, Ty makes small business financing and trends accessible in common sense language devoid of the jargon.


  1. Good Morning Ty we are trying to get a operating loan for our farm, our projection are great we just had a couple of low cashflow years. We feel we have it fiqured out know but no bank will look at us because of the last three year priors cash flow. We have paid every loan off prior to last years operating but it doesn’t seem to matter. We also have plenty of equity in our land. If a bank wont help us this year what do we do for operating this year? Who can we trust?

  2. Mary,
    First off, don’t give up after visiting only two or three lenders. Additionally, there are a number of specialty loan products available for specific purposes. Working capital loans, equipment loans, and others that might help you.

    The next question is how to pick a good lender over a bad lender. There are many non-traditional lenders in the space and they are not all created equal. Look for a lender who has been around for a while. Make sure they are willing to give you two or three success stories you can call to ask about the experience. If they won’t explain the terms they’re offering so you can understand, move on. You can also fill out a profile on Lendio to see what type of financing will be a match for you.

    I hope that helps.

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