Understanding Why Banks Reject Small Business Loans and How You Can Avoid It


You have already come up with a great business plan and you are on your way to making it happen. You have filed for a bank loan and completed the requirements as stated. You were very hopeful that it would end up the way you wish it would be but as the results came out, your application was rejected. This is heartbreaking. The good thing is that you can still apply for loans next time from other sources. By understanding how you were rejected, you won’t be able to make the same mistakes again.

Bad credit scores

Your personal credit history will be checked before your loans will be approved. Make sure that your credit score is good. You must not have failed businesses in the past or have filed for bankruptcy. You must have also paid your previous debts on time. A bad credit score could lead to rejected applications. Try improving your credit score so that next time, your application will not be rejected anymore.


Your cash flow is weak

This is another reason for rejection. You just don’t have enough monthly income to support the payment for the amount you have borrowed. It means that you only rely on the business you are to start which is not yet certain to succeed. The best way to get out of this problem is to limit your expenses. You need to show that even if you have limited income, you also don’t spend as much money. They might give you a chance if you can prove that you can make the most out of your limited income.

Banks are just too strict

We can’t deny that banks have really strict policies. They need to. They serve thousands of people. If they will just give loans to everyone without the assurance of being repaid, it could drive them to bankruptcy. Therefore, rejection rates in banks are really high. The best way to solve this problem is to just look for other ways to borrow money. Lending firms, peer to peer lenders and online merchants are a good alternative. As long as you stick with reliable sources, you have nothing to worry.

Lack of required documents

As soon as you apply for a small business loan, you need to make sure that all the documents are available. Sometimes, they provide extra time to submit the missing documents, but it helps that everything that they require is there. You have to understand the basic requirements like contracts, leases, licenses and permits and other documents needed to operate the business. If they feel like you are ready to get started, your chances of having these loans approved will increase.

Don’t despair if you were rejected. This is not the end. All businesses start that way. You have to gather yourself and find a way to do better for your next small business loan application. If you can prove to them that this business will succeed, they won’t turn you down.

Photo Attribution:

Featured and 1st image courtesy of Stuart Miles / freedigitalphotos.net

2nd image courtesy of Stuart Miles / freedigitalphotos.net