What to Do If Your Business Does Not Qualify for a Loan

By Tim Kelly

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Will Your Business Qualify for a Loan?

If your business is ready to take a leap but you don’t have the working capital to do so, applying for a commercial loan could be a smart move. Whether you’re looking to move to a new physical location, you’re looking for low-interest equipment financing, or you just want to build your credit, there are many good reasons to apply for commercial loans.

Although small business loans are easier to obtain than traditional bank loans, there is still a stringent application process. This means that not every business qualifies for a loan. Don’t fret, however. Just because you don’t get approved for your first application doesn’t mean you will never secure financing. Here’s why you might be denied a loan and what you should do next.

Understanding loans for small businesses

These days, there is a range of lending streams available for small businesses, including peer-to-peer loans, government grants and more. However, perhaps the most popular lender to small businesses is the Small Business Administration (SBA).

The SBA is a government-backed program that partially guarantees loans supplied by third-party lenders. The SBA doesn’t give out loans directly. Instead, it encourages lenders to fund small businesses by guaranteeing portions of the loan to mitigate risks for the lender.

SBA loans can be used for almost any purpose, from company acquisition to industrial equipment financing and disaster relief. However, they are not typically available to start-ups. They boast low interest rates and long repayment terms, so they are ideal for growing organizations. However, you need to meet the SBA’s eligibility criteria to qualify.

Criteria of an SBA loan

There are various types of SBA loan program, each with their own unique criteria. For example, microloans typically come from community lenders with higher interest rates, so they are easier to obtain than low interest rates business loans. Conversely, the SBA 504 loan program relies on two lenders, so there are often stricter loan qualifications.

As SBA loans have extremely attractive terms, they are very competitive. Although the eligibility criteria vary among lenders, there are some essential requirements for all SBA loans. To be most eligible for a small business loan you should meet the following criteria:

You are a U.S. based for-profit business
You have a strong personal background and character, including no criminal record
You are a small business – i.e. your net worth is less than $15 million
You have at least 2 years’ experience as a manager or leader in your industry, proven by strong business credentials
You can show experience working with profits and losses
You have a high personal credit score, usually of 620 or above
You have adequate collateral
You have a business plan

If you think your business meets the criteria for an SBA loan, you can access the loan approval checklist and apply online.

Why you might not qualify for a loan

There are many reasons why you might not qualify for a cash advance from the SBA. Getting a business loan is notoriously difficult, and you won’t be the first or the last to be rejected.

Here are two of the main reasons your loan application may have been rejected:

1. Your credit score wasn’t high enough

A recent report showed that one of the primary reasons why small business don’t qualify for a loan is because the owner didn’t know their credit score. If you’ve never been in debt, you might assume your score is good. However, credit is complicated. It can be affected by details such as how long you have been at your current address and whether you’re registered to vote.

To have a good chance of being approved for a loan, you should aim for a personal credit score of 700 or higher. You can boost your credit score by getting a full credit report online and finding out the areas you need to work on. You may need to take out more business credit and smaller loans first so that you can prove that you’re a reliable borrower.

2. You’re not experienced enough

If you’re still in the early stages of business, you may struggle to get the funding you need through an SBA loan. Lenders want to see that you have a track record of healthy revenues, success, and experience in your market before they can consider you a low-risk borrower. Alternative sources like online lenders, grants and crowdfunding might be better sources of funding for your start-up business.

What to do if your business does not qualify for a loan

The best thing to do if your business gets denied a business loan is to find out why you weren’t accepted. Your lender should be able to tell you why you didn’t qualify this time and give you tips for creating a stronger application in the future. You will need to wait some time before applying for another loan so as not to negatively impact your credit score.

“Today, if you look at financial systems around the globe, more than half the population of the world – out of six billion people, more than three billion – do not qualify to take out a loan from a bank. This is a shame” – Muhammad Yunus, Social entrepreneur, banker and economist

Conclusion

If your business doesn’t qualify for a loan, the bottom line is that your lender thinks the conditions of the loan are too risky. This might be because you have low credit, not enough experience in business or that the reason you need the money (and your method for paying it back) isn’t clearly laid out in your business plan.

Lenders want to make sure your venture is going to be successful so that you can pay them back. If you weren’t approved this time, the best thing you can do is find out why. You can use this information to strengthen your loan proposal, do your homework and keep up with industry trends. Your next move is to apply for an SBA loan at a later time or look for alternative funding sources.