When applying for a small business loan, it's important to be aware of the most common reasons for rejection. Understanding these rejection reasons can help you prepare for the loan application process and ensure that you provide lenders with the best possible information. Here are the most common reasons for loan rejection:
1. Inconsistent submitted information
- Inconsistent information throughout the documents submitted can lead to rejection of a business loan, such as a discrepancy between the registered company name and the operating address, or a mismatch between the regular cash inflows and outflows and the transactions seen on the bank statements.
2. Business without substantive operations
- Businesses may be rejected for a loan if they are not actively operating and have not kept proper documentation or records to prove their operations. This is because lenders need to be sure that the business has been operating in a legitimate manner and is likely to be able to repay the loan.
3. The guarantor(s) have applied for other business loans
- The guarantors (usually the major shareholder) of a business loan application may have applied for other loans as guarantors, which can lead to a higher risk of defaulting from the lenders’ perspective on the business loan due to their existing financial commitments.
4. Applying multiple loans in a short period of time
- Applying for multiple business loans in a short period of time can be a sign of financial mismanagement, and is likely to be viewed negatively by lenders. This can lead to rejections, as lenders may fear that the applicant is not responsible enough to manage their finances in a way that will enable them to repay the loan.
5. Change of the shareholder(s) or director(s) before the application
- Changes in shareholding structure or directors that occurred prior to the loan application may be a cause for rejection, as lenders may not be comfortable with the current structure or the motivations of the board.
6. The guarantor(s)' credit history or the company’s credit history is not favourable.
- The guarantor(s) or the company must have a good credit history in order to be eligible for a business loan. Lenders may be reluctant to provide a loan if the credit history of the guarantor(s) or the company is not satisfactory in the TU report (for the guarantors) or CCRA report (for the company).
7. Insufficient cashflow for covering the prospective repayment amount
- Companies must demonstrate that their cashflow or margin can cover the repayment amount, for example, if the effective annual interest rate is 10%, roughly speaking, the gross margin should be higher than 10%.
8. Outdated financial statements
- Business loan applications require the most up-to-date financial statements in order to gain an understanding of the current financial state of the business. Without this information, lenders are unable to assess the creditworthiness of the business and the proposed use of funds. Especially there are more and more revenue-based type of financing options which require the business to share the latest sales revenue information.
9. Unclear business plan
- Business lenders want to understand the details of a business plan in order to assess the viability of a loan. These details include the mission and vision of the business, its goals, strategies and objectives, and the financials, including cash flow statements, balance sheets, and income statements. The business plan should address any risks that the business may face and provide evidence that the business has sufficient resources to repay the loan. Additionally, the business should have a solid track record of success and be able to demonstrate that it has been able to sustain and grow its operations.
10. Unstable source of funding for repayment
- For a business loan application, the source of funding for repayment must be a reliable, consistent income source that can be verified. Especially for loan products like revenue-based financing, invoice financing or revolving credit line. The applicant must be able to demonstrate that they have the stable means or recurrent revenue to repay the loan.
Knowing the most common reasons for loan rejection can help you better prepare for the loan application process. By understanding these rejection reasons, you can make sure that you provide lenders with the best possible information and increase your chances of approval.