Why Business Loans are Rejected

why business loans are rejected

Estimated reading time: 2 minutes

Access to capital is a concern for many small business owners, even when interest rates are low and lenders extend funding in record amounts. Unfortunately, business owners whose loan applications get denied do not always know why. This blog entry from Balboa Capital explains some common reasons why business loans are rejected.

Poor credit history.

When reviewing a business loan application, the credit history and Paydex score are two things lenders evaluate. A good credit score shows that a small business owner has a solid handle on their personal and business credit, which every lender likes to see. But on the other side, a poor credit score does not instill confidence in lenders.

A small business owner with a sub-par credit rating might not meet the financial obligations outlined in the loan agreement. Unfortunately, this is a common reason why business loans are rejected. That said, many lenders offer bad credit business loans that are relatively easy to obtain.

Cash-flow issues.

Entrepreneurs start businesses to make money. Cash flow is the money that moves in or out of a business over a specific period. For example, if a company sells lots of its products or services and does not have exorbitant operational expenses or debt, it most likely has a positive cash flow.

Small businesses with cash flow problems present lenders with risk because there is always the chance that the loans might not be repaid. Cash flow represents the “health” of every small business and is an essential factor in the loan approval process.

Limited collateral.

Small businesses that are just starting or do not have sufficient cash flow or credit will need to pledge collateral when applying for a loan. Collateral will also be required if the business defaults on a previous loan. Businesses with a limited amount of collateral will face challenges when securing loans.

Business owners should consult with their lenders to determine which types of assets or property can be used as collateral. This might include cars, trucks, real estate, business equipment, and investments. If the business loan is not repaid, the lender can acquire and sell the collateral.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.