With most businesses operating on tight margins and fluctuating cash flow, it’s common for owners to look for commercial lending support to help them stay afloat, grow or invest in new opportunities. But if you’ve ever found yourself rejected for a business loan, you might be wondering if it’s even possible for you to continue running the company.
Here, we explore some of the most common reasons why business loans are rejected – so you can avoid them next time you apply for lending support.
1. Poor Credit History
There are many factors that can contribute to a poor credit history, and unless you regularly stay on top of your reports you might get caught out when it comes time to apply for a business loan. Some common reasons for a poor credit history include:
- Failing to make payments on time
- Unpaid or significant outstanding debts
- High number of credit enquiries
Whether you are a sole trader or manage a number of employees, it’s important that you monitor your finances throughout the year to ensure financial issues are addressed straight away.
2. Cash flow woes
No matter what type of lender you approach, one of the first things they will do is assess your ability to pay off the loan – in full and on time. They do this by vetting your finances to ensure you will be able to meet the minimum monthly repayments.
Seasonal businesses, those that are heavily influenced by market fluctuations, and companies that have endured cash flow challenges in the past will be seen as risky to lenders. Similarly, startups are often rejected for business loans because they don’t have a long enough history to decide whether they are capable of making repayments.
3. No eligible collateral
If your first port of call is to take out a secured loan – which has the advantage of offering a lower interest rate compared to unsecured loans – then you will need to have suitable collateral or else your loan will likely be rejected.
Collateral may come in the form of property, so if you don’t own your home or business property then you may need to switch to applying for unsecured loans. While these are generally easier for companies like startups to access, you will be paying a higher interest rate as a result.
4. Wrong lender or paperwork
Taking a scattergun approach to business loans isn’t the best strategy. Not only does it take more time, but you will likely be approaching the wrong lenders for your needs, and you may even end up filling out the wrong paperwork.
“Applying for business loans can get complicated, especially if you are approaching more than one lender,” says Gary Rawlings, Managing Director at Ezi Private Lending. “With so much else on your plate, it’s normal for mistakes to be made – but filling out the wrong application wastes your time, energy and can impact your credit rating. That’s why it’s important to seek out the services of a commercial lending expert who can manage all the paperwork for you.”
5. Weak projections
In addition to looking at your business’s cash flow, lenders will also expect you to have clear and solid projections for the future. What’s your capacity for growth? Do you have enough customers and demand to scale up in the future? How are you placed in the market compared to your competitors?
If your commercial outlook is weak or if you simply haven’t taken the time to put together thorough projections for the lender, then a business loan rejection is more than likely.
If you’ve struggled with business loans in the past or need financial support for a future commercial endeavour, a broker can save you time and hassle while also matching you with the right lending solution.