When your business needs capital urgently, applying for a business loan can be an anxiety-inducing process. Your fingers and toes will be crossed that your application is successful so you can get on and grow your company.
But unfortunately, not every application is successful. Different lenders have different criteria, and there are a number of factors which might affect a business’s eligibility.
Here are some of the most common reasons why your small business loan application might be rejected, and what you can do to increase your chances:
#1 You haven’t been trading for long enough
You might not consider your business to be a start-up anymore. But that doesn’t mean lenders will necessarily agree with you. When it comes to newer businesses, the first few years are critical. And not all of them manage to survive.
These newer businesses also have less history for the lender to gauge their risk against.
For these reasons, some lenders may be cautious about businesses which haven’t been trading for a certain length of time.
Every lender has their own criteria, and their own idea of what constitutes a start-up. So make sure you check their eligibility criteria before you apply to save yourself from wasting time.
#2 Your turnover isn’t high enough
Some lenders will use your turnover as an indication of how healthy your business is, and therefore whether or not they think you’re eligible for finance. But the range of time they look at will vary between lenders.
For example, at Boost Capital for business loans we like to see a turnover of £6,000 a month or higher for the last three months. However, some lenders might look over a longer period of time.
Usually, when turnover is used to check eligibility, the lender will ask you to provide your business bank statements as proof. They’ll either ask for physical or digital copies, or they might be able to verify using Open Banking like we do.
#3 Your credit score is too low
Your credit score is a top-line number which can give lenders an indication of how you’ve used credit in the past, and therefore how likely it is that you can be trusted with more credit in the future.
Things can negatively impact your credit score include:
- Being late with your repayments
- Borrowing too much money
- Errors on credit report
- And more
Some lenders may have a minimum credit score that they like to see. If your credit score is below this threshold, they’re likely to reject your application for a business loan.
#4 You might be asking for too much
Asking to borrow too much money might not technically result in a rejection of your application, as the lender will probably just give you the option of taking a lower amount instead. However, if that lower amount isn’t what you need, you’ll have to look elsewhere for finance.
How much the lender is comfortable giving you will depend on a variety of different things, including your credit score, turnover and time in business.
The length of time you want to borrow the money over (known as the term) will also likely make a difference.
#5 What you plan to use the funds for
There are lots of reasons why your business might want a loan. (We wrote a post about some of the most common uses for a business loan.) But sometimes, what you plan on doing with the funds can influence whether or not your application is accepted.
Most lenders will ask you what you plan to use the funds for if your application is successful, and some might have restrictions over what uses they’ll allow. For example, they might not lend to business who plan on using the funds to pay for other debts or to buy property.
Make sure you check the lender’s criteria first so you don’t end up wasting your time. It’s also important to be honest and up-front with the lender – if you try to mislead them and get found out later, they might call the loan in early and demand you repay it.
#6 The legal structure of your business
Another limitation might be the legal structure of your business. By this, we mean whether your business is set-up as a partnership, limited liability partnership, limited company or whether you’re established as a sole trader.
Some lenders will only accept applications from limited businesses, or might have a minimum or maximum limit on the amount they can lend to sole traders or partnerships.
At Boost Capital, we can lend to sole traders, partnerships, limited liability partnerships and limited companies. However, we can’t lend £25,000 or less to sole traders or partnerships.
#7 The lender might consider your industry risky
To make sure they don’t lose their money, lenders do everything they can to limit their risk. They do this to make sure they’re only lending money to businesses who are likely to pay it back. As part of this, some lenders might choose to restrict certain industries.
For example, say 60% of construction firms a lender has given money to end up defaulting on their loans and can’t pay them back. It’s likely that lender is going to stop lending to construction firms to limit their risk in the future.
#8 You don’t have any collateral
Some lenders use assets which you or your business owns as collateral – or reassurance – just in case you’re unable to pay your business loan back. If you default on your loan, they can take those assets instead to make up for the money they’ve lost.
Those assets can include your business premises (unless you lease them) or your home (if you own your own). Loans which require collateral are known as secured loans (in this context, “security” is another word for collateral).
But if you don’t have any assets – or if the assets you own don’t have enough value – the lender is unlikely to accept your application.
The alternative in this case would be to get an unsecured loan, like those offered by Boost Capital – we don’t ask you for any assets in return for finance.
#9 You’re already borrowing too much
Your “debt utilisation ratio” shows lenders what percentage of the credit that’s available to you is currently being used. When the ratio is too high, it’s an indication that you’re “over-leveraged” (a fancy way of saying you’re borrowing too much money).
When this is the case, it could be a sign that you’re struggling, and that you keep borrowing money without being able to pay it back. This would likely put some lenders off from offering you any more funds.