Securing financing for your small business or real estate venture can feel daunting, particularly if you’ve received previous denials. Lenders turn down applications for a variety of reasons, including limited business tenure, incomplete documentation, issues in credit history, low cashflow, and even lack of knowledge about your industry. Submitting an incomplete loan package can lead to an automatic denial, even if you meet the underwriting criteria. That’s where brokers come in—we leverage our expertise to help businesses and real estate investors overcome these common obstacles. We supporting you in finding (and ultimately getting approved for) the products, lenders and strategies that best match your situation and business goals.
The Equal Credit Opportunity Act (ECOA) requires lenders to disclose the reasons for a loan denial, though certain exceptions apply. In the case of a decline, you may need to submit a formal written request to obtain this information, which could delay the process by weeks or even months. Understanding the most common reasons for credit declines – and how to address them – ahead of time can streamline your application process and save you significant time and effort. Here are the top 10 reasons your small business loan may be declined and actionable steps you can take to improve your chances.
- Incomplete Application: One of the most common reasons for application rejection is submitting an incomplete or improperly documented application. Lender requirements vary in terms of the criteria they want to evaluate for a given loan. Some want to see financials, while others prioritize credit history, asset valuation, cash flow, or operational history to assess eligibility. Some lenders require audited books, while others do not. Often, businesses prepare one package and submit it to a variety of lenders, resulting in applications that are insufficient, even though the applicant may be eligible for funding.
Solution: Partner with a loan broker who can first match you with a suitable lender and then create a thorough and accurate application package. Brokers serve not only as an extra set of eyes, but also possess a deep understanding of the documentation requirements for various lenders. By working with us, you’ll minimize immediate rejections from lenders who don’t have the time for back-and-forth requests for additional information. Streamline the application process by partnering with our team, and significantly increase your chances of approval.
- Low Credit Score: Credit scores can drop for various reasons, many of which may be outside your control. However, some lenders rely heavily on credit bureau reports when making lending decisions, even though these reports may not provide a complete picture of your financial health. A denial can be based on the personal credit score of the owner or principals (anyone with a 20% or greater stake in the business), or it can be the result of a business credit score such as a poor PAYDEX or Small Business Financial Exchange score.
Solution: Not all lenders weigh credit scores equally. Some prioritize personal credit ratings; others will privilege business scores, and still others ignore credit scores entirely in favor of other underwriting guidelines. By working with a broker, you can find lenders that will evaluate your business in its best light during the application process.
- High Debt-Service-Coverage-Ratio (DSCR): While a company may be cash rich or asset rich, what lenders look for is the relationship between debt costs and profits – i.e. your business’s ability to service its debt with its income. Lenders view a low profit to debt ratio as an increased risk, assuming that your business may struggle to handle additional debt with its existing cash flow.
Solution: A broker can help identify strategies that improve cash flow and reduce your debt load, such as debt consolidation or refinancing. These strategies focus on changing monthly debt service by reducing payments. This can be done by refinancing at a lower interest rate, an extended repayment term, or both. Alternatively, a broker may leverage products and lenders for your business that do not include DSCR in their underwriting process at all.
- Previous Loan Rejections: A rejection from one lender can trigger a chain reaction of denials. Even if you don’t disclose previous loan applications, your business credit report and financial data often reveal them. Transparency is crucial—attempting to conceal relevant information can backfire.
Solution: Understanding the reasons behind your previous loan denial is key to addressing the issue. Share this information with your broker, who can customize financing strategies to overcome barriers. For example, an experienced loan broker may match you with lenders who use a different set of underwriting guidelines when they evaluate your application. Knowing the issues that resulted in a previous decline will allow your broker to develop strategies that side step these challenges on your next credit application.
- Increased Financing Activity: A pattern of frequent borrowing may signal potential risk to lenders, raising concerns that if you continue to take on more debt you may not be able to repay your existing loans. Rapidly raising debt levels increases the perceived risk of default, making lenders hesitant to extend funding.
Solution: Debt consolidation simplifies your financial obligations by merging multiple loans into a single, manageable payment. We’ll help you find consolidation loans that reduce your interest rate and improve your credit score, making it easier to stay on top of your finances. Alternatively, a flexible line of credit may be suggested. This credit line can be opened one time, but then drawn on again and again when additional funds are needed. This flexible solution removes the need to apply for funding each time your company faces a new demand for capital. Your credit history will no longer reflect a stream of rapid applications, ensuring that when you do need to apply for a large amount of credit in the future, your business will be seen in the best light.
- Time in Business: Startups and new franchise owners often face challenges when applying for loans due to limited time in business. Without an established track record, it becomes difficult for lenders to assess your financial stability. This lack of history can lead to uncertainty, which translates to risk for lenders—making it harder for newer businesses to secure financing.
Solution: Often traditional lenders are unable to lend funds to startups because of regulations or lending criteria put in place to protect the funds of depositors. However, there are lenders that are unconcerned with time in business and underwrite projects based on other criteria. Our brokers help startups and new businesses to leverage these lenders when sourcing capital. From franchising to launching a software company, or completely new concept, we can match borrowers with the right funding. For businesses less than three years old, explore startup loan options with your broker that are designed to meet the needs of newer ventures.
- Collateral: Especially in real estate, equipment, and other asset-based borrowing, lenders heavily weight what assets your business can pledge to secure the loan. Rather than a large down payment, if the item you are purchasing, such as equipment or real estate has sufficient value, the lender will extend credit in exchange for leverage of the asset. Additionally, to reduce interest rates on working capital funding, leveraging business property can reduce your cost of money.
Solution: Often bridge or private funding can leverage existing assets. Borrowing can be based on anything from real estate to stocks and bonds, depending on the lender.
- Bankruptcy: Past bankruptcy raises significant concerns for lenders, as it indicates potential risk. Even if you have made strides toward recovery, lenders may interpret bankruptcy as a reflection of poor financial management, which can deter them from approving your application.
Solution: What criteria make a lender overlook a bankruptcy? Asset-based loans can help mitigate this risk by providing lenders with collateral to secure the loan, but so can cash-flow financing or factoring. We’ll assist you in identifying financing opportunities to source loan options based on your current scenario.
- Industry Type: Some industries are perceived as higher risk than others, with these perceptions fluctuating based on current economic conditions and each lender’s individual analysis. Sectors such as restaurants, bars, casinos, nonprofits, cannabis and construction often face scrutiny, leading many lenders to reject applications from businesses within these fields.
Solution: Specialized lenders have backgrounds and strong experience in specific industries, giving them insight into the unique challenges these businesses. These specialized lenders focus on niche markets, leveraging their expertise to give them an edge in supporting businesses like yours. Your broker can connect you with industry-specific lenders who view your application as a valuable opportunity rather than a risk.
- Capital/Down Payment: When you bring cash to the table, it does a lot to reduce the lender’s perceived risk. “Skin in the game” matters. When you make a larger financial investment in a project, lenders see you as being more committed to the success of your venture. Additionally, if you default on the debt, the lender’s risk is lower because you carried more of the financial burden up front.
Solution: When a business is low on capital, a bridge loan leveraging current assets can secure funding for a down payment on new resources. Taking on a silent partner who can bring cash to the deal, securing mezzanine funding, or taking preferred equity are all ways to close the gap in funds expected by your primary lender.
The path to overcoming a loan denial can seem daunting, but with the support of a loan broker, capital is available. Evaluating your current scenario, identifying options for financing, and creating a roadmap from where you are to where you want to be, are all critical steps in creating a successful financing and growth plan.
For every financing challenge, there is a path to capital for your small business. You just need to leverage the right strategy, lender, and product for your unique scenario. Contact our team today and we’d be happy to help you turn loan denials into funding approvals.