Applying for a business loan can be nerve-wracking. How do you know if you’re applying for the right loan? What if your application gets denied? These are all valid concerns, but don’t let the fear of rejection stop you from pursuing the financing your business needs.
Only 37% of small businesses apply for financing, and of those, banks reject about 80%. Even more surprising is that nearly 20% of businesses don’t apply at all, discouraged by the process itself.
The truth is, rejection is often part of the entrepreneurial journey. It doesn’t matter how many “no’s” you hear; all you need is one “yes.”
But to land that “yes,” you first need to learn why lenders may deny your application—and how you can improve for future attempts. Below, we break down the six biggest reasons small business loan applications get rejected and what you can do to turn things around.
1. Deficient Application
Your small business loan application is your chance to make a first impression with lenders. Many small business owners invest hours preparing their applications, gathering documents, and filling out forms, only to have their request rejected due to incomplete or missing information.
Lenders rely on your documentation to assess your business’s financial health and ability to repay the loan. If your application is missing key components—like income statements, bank statements, or tax returns—it raises red flags about your level of organization and responsibility.
How to Fix It:
- Double-check application requirements before submitting.
- Use an application checklist to ensure you include all requested documents.
- Spend extra time ensuring that your financial records are organized, clear, and error-free.
Remember, a few extra minutes reviewing your application now could save you weeks—or even months—down the road.
2. Short Track Record
Every lender wants to invest in businesses they can trust. For lenders, more years in business typically equal less risk. Unfortunately, if your business is new or hasn’t built a strong operational history, lenders may view it as too risky to fund.
Many traditional lenders require at least two years in operation to qualify for loans. If your business is newer, you may need to explore alternative options.
How to Fix It:
- Look into loans designed for newer businesses, such as startup loans or microloans.
- Build credibility by showcasing strong revenue trends or customer growth, even if your operating history is short.
- Partner with alternative lenders that have less stringent requirements, such as online lenders or community development financial institutions (CDFIs).
3. Insufficient Collateral
Collateral is an asset—such as equipment, real estate, or inventory—that acts as a guarantee for the lender if you’re unable to repay your loan. Many lenders require collateral to minimize their risk. If your business lacks sufficient assets to offer as collateral, your application may be denied.
How to Fix It:
- Offer personal guarantees, such as your home or savings, to secure the loan.
- Explore unsecured loans, which don’t require collateral (though they may come with higher interest rates).
- Build your business’s asset base by investing in equipment or property before applying for a loan.
Keep in mind that collateral requirements can vary by lender and loan type, so research options that best align with your resources.
4. Mediocre Business Plan
A business plan isn’t just a roadmap for your operations; it’s also an important tool for convincing lenders of your ability to succeed. If the plan you submit is unclear, incomplete, or uninspired, lenders may lose confidence in your ability to repay the loan.
Lenders want to see a clear plan for how you’ll use the funds and how those investments will drive revenue and profitability.
How to Fix It:
- Create a detailed business plan that includes financial projections, market analysis, and clear strategies for growth.
- Clearly articulate how the loan will be used and how it will directly contribute to increased profitability.
- Use professional templates or consult with a business advisor to ensure your plan is polished and compelling.
A strong business plan paints a picture of your company’s capabilities and potential, improving your chances of approval.
5. Poor Credit Score
Your credit score is one of the top factors lenders use to determine your creditworthiness. It provides insight into your past financial behavior, and a low score can make lenders hesitant to approve your loan. Both your personal and business credit scores may be considered during the review process.
Many lenders have minimum credit score requirements, especially for traditional loans. If your credit score doesn’t meet their criteria, your application is likely to be rejected.
How to Fix It:
- Check both your personal and business credit scores before applying.
- Pay off outstanding debts to improve your creditworthiness.
- Correct any errors on your credit report that could be negatively impacting your score.
- Build positive credit history by using and repaying smaller loans or credit lines on time.
The good news? Some lenders specialize in working with applicants who have less-than-perfect credit, so shop around to find the right fit.
6. Risky Industry
Certain industries—such as gambling, alcohol, trucking, or restaurants—are considered higher risk by lenders. Businesses in these sectors are statistically more likely to fail, which makes lenders less willing to extend funding.
This doesn’t mean your application won’t be approved—but it does mean you may need to explore alternatives.
How to Fix It:
- Highlight strong financial performance and sustainability to offset perceived risks associated with your industry.
- Seek out lenders who specialize in funding businesses within higher-risk sectors.
- Use industry-specific financing programs that cater to your field.
Understanding the risks tied to your industry can help you prepare your application and identify the best lenders to approach.
What to Do After a Loan Rejection
Receiving a loan rejection letter is never easy, but it’s important to view it as a learning opportunity. If your application is denied, lenders are legally required under the Equal Credit Opportunity Act (ECOA) to inform you of the specific reasons for the rejection. Use this feedback to strengthen future applications.
Next Steps:
- Review the rejection letter carefully to understand the listed reasons.
- Write down the areas where your application could improve.
- Research lenders who align with your unique business needs, history, and industry.
- Reapply when you’ve addressed the issues or consider alternative financing options.
Remember, many successful businesses have faced rejection multiple times before securing funding. Persistence is key.
Don’t Give Up—Find the Right Fit
Applying for a small business loan can be challenging, but it’s not impossible. By understanding and addressing the common reasons for rejection—deficient applications, short track records, insufficient collateral, mediocre business plans, poor credit scores, and risky industries—you can increase your chances of approval the next time you apply.
Remember, there’s a financing solution that’s right for your business—you just need to find the right lender. Keep refining your application, and don’t stop pursuing the capital your company needs to thrive.