Business Loans: Why Banks Say No

When a small business owner approaches a local or national bank for a business loan, it is usually because they are unable to acquire funding through other sources. Unfortunately, these small business owners may find that banks are also unwilling to lend to them—specifically, because they do not fit the criteria for approval.

Denial of a small business loan may mean a business is unable to secure the funding for a startup or feed necessary growth and, hence, that it will have to close its doors permanently. So what are some of the most common reasons your business may be denied a loan by a bank? This article addresses that question and provides you with some tips on how to get approved for a small business loan by a North Carolina bank.

Your credit history is the most important piece of the puzzle, and it will be scrutinized by lenders during the approval process in the form of your credit score, which is basically a summary of your credit history. There are several versions of this score, which is most often the determinant factor in your ability to be approved for a loan and get a good interest rate.

Banks typically have a threshold in terms of the credit score they will accept for a specific type of loan. If your score falls below the threshold for the small business loan type, your application will almost certainly be rejected.

You have the right to request your credit report if you are turned down by a lender. This allows you to confirm the reason for loan denial and understand clearly where you need to make improvements.

While a low credit score is the most common reason you may be denied a business loan, the following are other reasons why your organization may hear “no”.

Failure to provide all of the necessary documents for a business loan application could lead to rejection. You may still be denied when you provide all required documents if there are discrepancies in available information.

Your earnings are a sign of your ability to fulfill loan obligations. Therefore, banks typically consider how much your business makes when examining applicants for loans. If you are not able to prove that your business has a steady cash flow, you are not very likely to be approved.

You may not be able to get a business loan if you have other debt obligations to contend with. This can raise doubt about your ability to meet those other obligations while also repaying the term loan at the same time.

Banks have systems they use for ranking loan applications, and these differ between lenders. Such may rank applications from A to D, where A denotes lowest risk and D highest risk. In addition, some banks use a number-based grading system to further categorize applications. These types of systems use a variety of factors to determine the level of risk associated with each loan request.

Factors that lenders consider when analyzing your business include the type of business or industry and your managerial experience in that industry. Your odds for approval improve if your industry is deemed low-risk.

With substantial collateral, you might find it easier to get approved for a business loan. Banks are more likely to approve a loan request if you already own and can leverage property or other assets that can be recovered in case you default.

While banks may be less strict when it comes to those who have ideal credit, good collateral etc., it is a reality that many applications will get turned down for the reasons we’ve discussed above. This is why it is essential, even if you believe your chances for approval are high, that you do your homework.

Here are some things you can do to boost your odds of success:

There are different types of business loans. In determining the right one, consider the amount you need, whether you need it as a lump sum and how long you think it will take for you to pay back the total amount. Familiarize yourself with associated interest rates and fees.

Identify all documentation that will be needed for the application process. Provide comprehensive information in your application—a business plan, for example, will help show lenders that you have a clear plan for your business and how you will pay back the loan. Make sure you fully understand and can justify every figure in your application.

Do everything you can to improve how your bank sees your application in terms of risk. Work on your credit history if it's currently not where you’d like it. Prove that your business has good cash flow or the potential to improve.

Did you know that we were actually VOTED the “Best Bank” in Cabarrus and Rowan counties by our customers? We want to help you figure out what options are best for your business! With the tips above, you may find it easier to get approved for your business loan. Your next step is to contact us to discuss your options for small business loans or other funding opportunities*.

For additional information or to apply for a loan today, contact an F&M Commercial Banker.