The #1 Reason Your Business Loan Wasn’t Approved

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Small business loan approval rates have been slowly increasing in the first 3 months of 2013. In February, the approval rate for SMB loans at big banks ($10 billion or more in assets) was 15.9%.

Although this represents a 35% increase over this time last year (11.7%), the fact of the matter is that only 15 loans are approved for every 100 applicants (Biz2Credit). So, why was your business loan declined? There is one very big reason: your credit history.

Your Credit History

Banks want assurance that you will be able to pay back their loan. The less likely you are to default, the less risk the bank takes in providing you with a loan. Your entire loan application is an argument for proving that giving your business a loan will help the bank make money, not lose it.

Your business plan and financial information are a large part of that – they show your current cash flows, the room you have in your budget for bank payments, and your plan for paying the money back. However, the bank knows that past history predicts future results, so no matter how good those elements of your application are, your credit history will still carry the most weight.

The credit history of your business is complicated by your own personal credit history. In the beginning stages of your business you rely solely on your personal credit in order to set up business bank accounts, apply for business credit cards, and so on.

It takes a number of years, therefore, for your business’s credit to become independent of your own. Even then, you may still have to personally guarantee your business loans, which continues the tangling of your personal and business finances.

  • In order to be the most successful with your loan application, you need to actively maintain good credit in both your personal and business finances.
  • Any history of missing payments (credit cards, loans, and even utilities or other vendors), maintaining high balances on credit cards, or opening too much new credit too fast can have a negative effect on your credit and, therefore, your loan application. With such tight lending restrictions in place, your business loan could be denied on account of a dentist bill you never paid back in 2007.

Now What Do I Do?

When your bank loan isn’t approved, don’t panic. Remember, you only had a 15% chance of getting a loan from a big bank. Ask the bank for the reason for the denial – whether it was an aspect of your credit history, a problem with your business plan, or some other factor.

Knowing exactly what the problem was can help you come up with a strategy for getting your next loan approved. This may involve paying down your current debt, cutting expenses, or spending several months making on time bill payments.

  • Just because one bank rejected your application doesn’t mean every bank will. In fact, small banks ($500 billion or less in assets) had a small business loan approval rate of 50.3% in February 2013. Similarly, although credit union approval rates have dropped 20% over the past year, their approval rate – 45.9% – is still far greater than that of big banks.

The reasons why banks reject business loan applications are numerous and varied. Your business may be too new, have insufficient assets or cash flow, or can’t adequately justify the reasons for the loan. The most important element of your loan application – your credit history – is also the most likely reason for your loan rejection. In order to be more successful, try applying at a smaller bank, and work on improving both your business and your personal credit.

Bio: Megan Webb-Morgan is a business blogger. She writes about business loans for ResourceNation.com. Follow them on Twitter and Facebook for more startup advice.