5 Common Reasons Business Finance Applications Are Rejected

5 Common Reasons Business Finance Applications Are Rejected

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If you’re planning on applying for business finance, it’s a good idea to start preparing for your application in advance. Unfortunately, not every business will be approved finance, but there are steps you can take to improve your chances of success. 

Here are five of the most common reasons business finance applications are rejected, so you can learn from others’ mistakes or figure out where you might have gone wrong with previous applications. 

1. You Have a Low Credit Score

Most lenders and finance providers will decide to approve or reject your loan application after conducting a credit check on you and your business. While those with a high credit score fly through credit checks, finance providers are often wary of businesses with low credit scores. 

A low business credit score can indicate to finance providers that you’ve previously made late payments or that you have a lot of existing debt. This can put finance providers off — they don’t want to take a risk on someone who is likely to miss a payment or borrow more than they can afford. 

2. You’re a New Business

Another reason your credit score may be low is if your business hasn’t been established for very long. Credit scores take time to grow, but if you’ve only been in business for a short time, you won’t have had a chance to build on it. 

Some finance providers will need to see at least three or four months of credit history, while others might require a year or more. One thing to bear in mind is that there may be a delay between when you start building your credit history and when you see an improvement in your credit score — credit reports can take time to catch up. 

3. You’re Applying for the Wrong Type of Loan

There are lots of different types of business finance. If your application for a loan was declined, it could simply be that you applied for a finance solution that wasn’t best suited to your business. 

If you’ve applied for a standard cash business loan without success, you should consider a more specific type of finance. Think about what you need finance for — do you have large orders to fund or do you need a cash advance on unpaid invoices?

Alternative finance solutions like invoice and purchase order finance allow you to leverage the value you have tied up in invoices or pending orders. Because these finance solutions are often considered lower risk than loans, as funds are provided against your accounts receivables, you may be more likely to secure this type of finance. Applying for a loan that’s suited to your financial needs can improve your chance of success. 

4. You’re Applying to the Wrong Finance Provider

As well as different types of business loans, there are also different types of finance providers. If you’ve been applying for bank business loans and have had no success, it might be that a bank just isn’t the right lender for you. 

Banks, especially big banks, tend to have a lower approval rate than alternative finance providers. Alternative providers can consider your application on a more personal level. They’ll get to know you — the business owner — and take your business’s performance into account as well as your credit report and cash flow statements. This way, they’re able to offer finance to a wider range of businesses. Some alternative providers will also help you find you the best finance solution for your business. 

5. You Don’t Have a (Good) Business Plan

If you applied for a business loan without first creating a thorough business plan, this could have been your downfall. A business plan is how you show finance providers that you’re a trustworthy investment. It’s your chance to prove that you’ve thought about how to manage your finances and how to grow your business. Finance providers are keen to work with businesses that have realistic growth aspirations — they want you to show potential. 

The process of creating a business plan will benefit you and the financial provider you apply to. In thinking about how to grow, and the steps you’ll take to achieve your ambitions, you’ll start to get a clearer idea of how much you need to borrow and how you’ll make the most of any extra funds.

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