Finding financing for your small business or real estate venture can feel overwhelming, especially if you’ve had previous rejections. Lenders reject applications for a variety of reasons, including limited business time, incomplete documentation, credit history issues, low cash flow, and even a lack of knowledge about your industry. Submitting an incomplete loan package can result in automatic rejection, even if you meet the underwriting criteria. That’s where realtors come in—we use our expertise to help businesses and real estate investors overcome these common obstacles. We support you in finding (and ultimately getting approved) the products, lenders and strategies that best suit your situation and business goals.
The Equal Credit Opportunity Act (ECOA) requires lenders to disclose the reasons for credit denials, although some exceptions apply. In the event of a denial, you may need to submit a formal written request for this information, which may delay the process by weeks or even months. Understanding the most common reasons for credit downgrades – and how to deal with them – early on can simplify your application process and save you valuable time and effort. Here are the top 10 reasons why your small business loan may be declined and steps you can take to improve your chances.
- Partial app: One of the most common reasons for application rejection is submitting an incomplete or poorly written application. The needs of the borrower vary according to the criteria they want to check in order to get the loan provided. Some want to see financials, while others prioritize credit history, asset valuation, cash flow, or work history to assess eligibility. Some lenders require certified letters, while others do not. Often, businesses prepare one package and send it to various lenders, resulting in insufficient applications, even though the applicant may be eligible for funding.
Solution: Partner with a loan broker who can first match you with a suitable lender and create a complete and accurate application package. Buyers not only serve as an extra set of eyes, but also have a deep understanding of the documentation requirements of various lenders. By working with us, you’ll minimize quick rejections from lenders who don’t have time to ask back and forth for more information. Streamline the application process with our team, and greatly increase your chances of approval.
- Low Credit Score: Credit scores can go down for a variety of reasons, many of which may be out of your control. However, some lenders rely heavily on credit bureau reports when making lending decisions, even though these reports may not provide a complete picture of your financial health. A denial can be based on the personal credit score of the owner or principals (anyone who owns 20% or more of the business), or it can be the result of a business credit score such as a poor PAYDEX or Small Business Financial Exchange. The result.
Solution: Not all lenders measure credit scores equally. Some prioritize personal credit ratings; some will give you the benefits of business scores, while others ignore credit scores in favor of other underwriting guidelines. By working with a broker, you can find lenders who will evaluate your business in its best light during the application process.
- High Debt-Service-Coverage-Ratio (DSCR): While a company may be cash-rich or asset-rich, what lenders look for is the relationship between debt costs and profitability – ie your business’s ability to service its debt with revenue. Lenders view a low interest rate on debt as additional risk, thinking that your business may have difficulty handling additional debt with existing cash flow.
Solution: A broker can help identify strategies that improve cash flow and reduce your debt burden, such as debt consolidation or refinancing. These strategies focus on changing monthly debt service by reducing payments. This can be done through financing with a lower interest rate, an extended repayment period, or both. Alternatively, the broker may use products and lenders for your business that do not include DSCR in their underwriting process at all.
- Previous Loan Rejection: A single lender’s rejection can trigger a chain reaction of rejections. Even if you don’t disclose previous loan applications, your business credit report and financial data often do. Transparency is important—trying to hide relevant information can backfire.
Solution: Understanding the reasons for your previous loan rejection is key to solving the problem. Share this information with your salesperson, who can customize fundraising strategies to overcome obstacles. For example, an experienced loan broker may match you with lenders who use a different set of underwriting guidelines when evaluating your application. Knowing the problems that caused previous declines will allow your broker to develop strategies that address these challenges in your next loan application.
- Enhanced Financial Function: A pattern of frequent borrowing may indicate a potential risk to lenders, raising concerns that if you continue to take on more debt you may not be able to repay your existing loan. Rapidly raising debt levels increases the perceived risk of default, making lenders more reluctant to extend financing.
Solution: Debt consolidation simplifies your financial obligations by combining multiple debts into one, manageable payment. We’ll help you find a consolidation loan that lowers your interest rate and improves your credit score, making it easier to stay on top of your finances. Alternatively, a variable credit line may be suggested. This line of credit can be opened once, but can be drawn on more often if additional funds are needed. This flexible solution eliminates the need to apply for funding each time your company faces a new funding need. Your credit history will no longer show a series of quick applications, which ensures that if you need to apply for a large amount of credit in the future, your business will be seen in the best light.
- Time in Business: Startups and new franchise owners often face challenges when applying for a loan due to limited time in business. Without an established record, it becomes difficult for lenders to assess your financial stability. This lack of history can lead to uncertainty, which translates into risk for lenders—making it difficult for new businesses to secure financing.
Solution: Often traditional lenders cannot lend money to startups due to regulations or lending criteria set to protect investors’ funds. However, there are lenders who do not care about time in the business and underwrite projects based on other methods. Our clients help start-ups and new businesses to use these lenders when looking for money. From franchising to launching a software company, or an entirely new concept, we can match borrowers with the right financing. For businesses less than three years old, check with your broker for financing options designed to meet the needs of a new business.
- Guarantee: Especially in real estate, equipment, and other asset-based lending, lenders weigh heavily on what assets your business can pledge to secure the loan. Rather than a large down payment, if the item you’re buying, such as equipment or real estate, has sufficient value, the lender will extend the loan to get the property’s interest. Additionally, to reduce interest rates on working capital financing, using business assets can reduce your cost of capital.
Solution: Often bridging or private funding can use existing assets. Lending can be based on anything from real estate to stocks and bonds, depending on the lender.
- Bankruptcy: Past bankruptcies raise serious concerns for lenders, as they indicate potential risk. Even if you’ve made a step toward recovery, lenders may interpret bankruptcy as showing poor financial management, which can prevent them from approving your application.
Solution: What are the factors that make a lender ignore bankruptcy? Asset-based loans can help reduce this risk by providing lenders with collateral to secure the loan, but so can cash-flow financing or financing. We will help you identify financing options for loan options based on your current situation.
- Industry Type: Some industries are considered higher risk than others, with these opinions changing based on current economic conditions and the individual analysis of each lender. Sectors such as restaurants, bars, casinos, non-profit organizations, cannabis and construction often face scrutiny, leading many lenders to reject applications for businesses within these sectors.
Solution: Specialist lenders have strong backgrounds and experience in specific industries, giving them insight into the unique challenges of these businesses. These specialized lenders focus on niche markets, using their expertise to give them an edge in supporting businesses like yours. Your broker can connect you with industry-specific lenders who view your application as a valuable opportunity rather than a risk.
- Cash/down payment: When you bring cash to the table, it does a lot to reduce the risk perceived by the lender. “Skin in the game” is important. When you invest a lot of money in a project, lenders see you as more committed to the success of your business. Additionally, if you default on a loan, the lender’s risk is lower because you have borne a greater financial burden up front.
Solution: When a business has a lot of cash, a bridge loan using current assets can secure down payment financing for new services. Taking on a silent partner who can bring cash to the deal, securing mezzanine financing, or taking preferred equity are all ways to close the financing gap expected by your primary lender.
The path to overcoming credit rejection can seem difficult, but with the support of a loan broker, capital is available. Assessing your current situation, identifying financing options, and creating a road map from where you are to where you want to be, are all important steps in creating a successful financing plan and growth.
For every financial challenge, there is a way to get financing for your small business. You just need to use the right strategy, lender, and product for your unique situation. Contact our team today and we’d be happy to help you turn a loan rejection into a financing approval.
