Bank Loan Denials

Bank Loan Denials

Reasons Behind the Rejection of Business Loan Applications

Many Individuals Struggle to Secure Funding for Business Expansion

Many individuals immediately turn to banks for funding when looking to grow their business, not realizing that their business credentials, rather than personal credit, are crucial for securing finance. Additionally, they often don’t know that there are ways to enhance their chances of getting a business loan.

Lenders are nervous about lending to a company that is new. Starting a business with a corporation or LLC that is several years old grants an advantage.

  • Decline in Approval Rates at Big Banks: The approval percentages for small business loans at big banks (those with $10 billion+ in assets) have been decreasing. For instance, the approval rate fell from 13.2% in August to 13.1% in September. This decline has been ongoing since June 2022 .

  • Stable and Rising Approval Rates at Small Banks and Other Lenders: In contrast, small banks have proven to be more reliable sources for small business loans. These banks often process more government-backed SBA loans, which reduces their exposure to risk. The approval rates at small banks rose from 19.1% in August to 19.3% in September. Similarly, institutional investors saw a slight increase from 27.4% in August to 27.5% in September, and alternative lenders’ approval rates increased from 29.5% to 29.7% during the same period. Credit unions also saw a marginal increase from 19.8% to 19.9% .

  • Reasons for Decline in Big Bank Approvals: The decline in loan approvals by big banks can be attributed to several factors. One primary reason is the rise in interest rates, which has particularly affected commercial real estate loans, commonly made to small businesses by big banks. Additionally, regulators are planning to raise overall capital requirements for some of the largest banks by 2026, influencing the banks to prepare for this change, as many small business loans have terms of 5 to 7 years .

  • Role of Alternative Lenders and Institutional Investors: With the tightening of bank lending, borrowers have increasingly turned to non-bank lenders. Institutional investors and alternative lenders have seen a steady increase in their approval rates over several months. This trend is partly due to more capital being directed towards these lenders from investors, like insurance companies, seeking higher yields in the current rate environment .

  • Challenges for Credit Unions: Credit unions, similar to banks, are facing difficulties in soliciting deposits, which has affected their loan approval rates as well .

The Likelihood of Securing a Loan from a Bank is Relatively Low Without Building a Foundation Beforehand

If the business applies for bank loans without laying down the foundation of business credit, often this leads to the rejection of a loan application.

A Business Loan Can Be Denied for Many Different Reasons

In 2016, a New York Fed survey involving more than 10,000 small business owners identified various reasons for loan rejections. These included inadequate collateral for the requested loan amount, poor business performance, low credit scores, limited credit history, and excessive debt.

Solution: Build Business Credit Before You Approach The Bank!

Not getting Funding Can Mean a Business May Fail

More than 80% of small business failures are attributed to issues with cash management. Approximately 50% of businesses fail because their products or services are no longer needed. Over 20% of small enterprises shut down due to insufficient funds. While most businesses fail within their first decade, your business doesn’t have to follow this trend.

Lenders Rely on Data to Make Decisions About Your Loan Application

Lenders collect information from various undisclosed sources without notifying business owners. Being aware of these covert data points can be advantageous. Understanding the most critical factors simplifies the loan acquisition process, helping you prioritize your efforts effectively. This knowledge could be pivotal in determining whether your loan application is approved or rejected.

Data Utilized by Lenders: LexisNexis

Numerous lenders who deny loan applications source their information from LexisNexis, which provides insights into an applicant’s likelihood of repayment. Lenders compare the details from LexisNexis with the information provided in your loan application. Inconsistencies between your application and LexisNexis data can lead to loan denial. LexisNexis uses a unique system to connect all your personal records, encompassing both positive and negative aspects. This includes access to your arrest records, information on all your previous addresses, any speeding violations, and details of every mortgage you’ve held.

Data Utilized by Lenders: Small Business Financial Exchange

The Small Business Financial Exchange (SBFE) is a non-profit organization that gathers data on small businesses from its member contributors, who are typically the businesses’ owners and lenders. This information is utilized to generate comprehensive credit reports, aiding lenders in making informed credit decisions. Operating as a highly confidential, large-scale data repository, the SBFE works on a reciprocal basis, where members contribute data about their borrowers, like payment histories, and in return, gain access to the exchange’s collective information. Having complete data on a business is advantageous for lenders. The SBFE’s approach is thorough, providing more than just payment history. They supply data to credit monitoring services and LexisNexis. Any inconsistency in the business information provided in applications can lead to loan rejections. SBFE partners with Accredited Vendors for credit monitoring, including Equifax, Experian, Dun and Bradstreet, and LexisNexis Risk Solutions, which are the only Certified Vendors so far. While lenders might use various credit sources, those who join the SBFE and engage a Certified Vendor benefit from the combined data resources of both the vendor and the SBFE.

What Makes the SBFE and LexisNexis Data Valuable to Lenders?

Lenders utilize this data to verify the details in loan applications. They are assessing whether their lending criteria are fulfilled. The goal is to ensure that the information you provide on your application aligns with the existing records. Credit issuers are keen to understand the likelihood of a company’s failure.

Consistency in Records

Your business name, address, and phone number should align with your IRS filings, and match the history maintained by Dun & Bradstreet, Experian, and Equifax, as well as all your permits and incorporation documents. To guarantee accuracy, it’s advisable to copy and paste this information.

Looking to Prevent Loan Rejections? Focus on Building Funding Capacity and Positive Reporting

Preserve a professional image for your business by having a credible website and email address, a toll-free telephone number, a 411-directory listing, a physical business address (not a PO or UPS box) and securing all necessary licenses.

Looking to Prevent Loan Rejections? Obtain Your Business Identification Numbers

The most recognized business identification number is the DUNS number, which registers your company in Dun & Bradstreet’s (D&B) database. This step is crucial and should not be overlooked. You can apply for a DUNS number on the D&B website and expect to receive it within a few weeks. Your PAYDEX score, which is based on your DUNS number and three trade experiences, will also be established. Another key industry identifier is Experian’s BIN (Business Identification Number), assigned by Experian’s BizSource. You can locate your company’s BIN at: sbcr.experian.com/main.aspx.

Looking to Prevent Loan Rejections? Focus on Establishing Business Credit

Business credit is established under the name of the company, not the owner, and it reflects the company’s capacity to repay debts. Without a solid or existing business credit score, lenders won’t be confident in the company’s ability to repay. Business credit doesn’t develop automatically; it requires dedicated effort. With strong business credit, you can secure loans without personal guarantees, even if your personal credit is weak, thus separating the business liabilities from the owner. Building this credit typically takes about four to six months. Your business credit reports are visible to prospects, competitors, potential buyers, customers, and others, making it essential to build a positive credit history. Business credit is a significant asset that can enhance your borrowing capacity beyond consumer credit limits, which are 10-100 times higher according to the SBA. Startups can qualify for business loans sooner than bank loans or alternative funding. With access to loans and credit lines, you can use your own profits for business expansion, giving you a competitive advantage. Any business in the U.S., including non-profits, can build business credit. A company’s creditworthiness determines its eligibility for a business loan, including the loan amount and terms. Lack of business credit can lead to loan denials. By making verified payments, you enhance your fundability. As your business credit and scores improve, you can seek higher limits on business credit cards, loans, and lines of credit.

Why is Business Credit Essential for Securing Business Loans and Credit Lines?

If you lack established business credit, you’ll find it challenging to secure bank loans or credit lines. Absent business credit leaves lenders with no reference for your company’s bill payment history, making them hesitant to approve your application. Consequently, any loan you do obtain would likely be personal, involving checks on your personal credit and potentially putting personal assets like your home at risk. However, this is not the case with business credit.

Business credit is essential for securing business loans and credit lines for several key reasons: 

  • Risk Assessment: Lenders use business credit scores to evaluate the risk associated with lending money to a business. A strong credit score suggests a higher likelihood of timely repayment.

  • Don’t Look New: Starting a business with a company that is several days old is a problem. Start a business with a company that is at least three years of age.

  • Loan Terms: Better credit scores often lead to more favorable loan terms, including lower interest rates, higher borrowing limits, and more flexible repayment options.

  • Credibility and Trustworthiness: A solid business credit history establishes a track record of financial responsibility, making a business more attractive to lenders and suppliers.

  • Separation of Personal and Business Finances: Establishing business credit helps in separating personal finances from business finances. This separation is crucial for protecting personal assets and improving the financial health of the business.

  • Access to Larger Credit Lines: Strong business credit can lead to approval for larger lines of credit, which are essential for managing cash flow, making investments, and sustaining operations, especially during growth phases or economic downturns.

  • Negotiating Power: Good business credit can provide leverage when negotiating terms with suppliers or lenders, potentially leading to better deals or more favorable terms.

  • Emergency Preparedness: Businesses with established credit lines can better manage unexpected expenses or economic challenges, providing a safety net during financial uncertainties.

In summary, building and maintaining a strong business credit profile is crucial for accessing necessary funding, securing favorable loan terms, and ensuring the long-term financial stability and growth of a business.

Establish Business Credit

Start by setting up vendor credit for your business. These are entry-level creditors who offer credit when others might not, often with Net 30 terms. Ensure you make payments on time with these accounts. Once you have a minimum of three vendor accounts, you can then seek retail credit. After managing retail accounts, the next step is to obtain fleet credit, which is used for expenses like fuel, equipment maintenance, and repairs. Finally, with at least 14 tradelines reporting, you can progress to more versatile cash credit options, such as Visa and MasterCard credit cards.

Looking to Prevent Loan Rejections? Keep an Eye on Your Business Credit.

Without monitoring your business credit, you’ll remain unaware of its status. Minor issues in your business credit can quickly become significant if not regularly checked. Stay informed about your company’s credit through Dun & Bradstreet, Experian, and Equifax. You can track all three at a cost that’s 90% lower than what a corporate credit reporting agency would charge. For more information, visit: creditsuite.com/monitoring.

To prevent loan rejections, consider the following strategies: 

  • Start a Business with An Aged Entity.

  • Build and Maintain Good Credit: Ensure your credit score is strong. Pay bills on time, reduce debt, and check credit reports regularly for errors.

  • Prepare a Solid Business Plan: A well-thought-out business plan demonstrates your understanding of the market and business viability.

  • Understand Lender’s Criteria: Different lenders have varied requirements. Understand their criteria before applying.

  • Organize Financial Documents: Keep financial statements, tax returns, and other necessary documents well-organized and updated.

  • Ask for the Right Amount: Request a loan amount that aligns with your business needs and repayment ability.

  • Provide Collateral if Possible: Offering collateral can improve your chances of loan approval.

  • Improve Debt-to-Income Ratio: Lowering existing debt can make you a more attractive candidate to lenders.

  • Apply to the Right Lender: Research and choose a lender that aligns with your business profile and needs.

  • Get Expert Advice: Consult with financial advisors for guidance on loan applications.

  • Address Previous Loan Rejections: If previously rejected, address the reasons before reapplying.

Each of these steps can increase your likelihood of loan approval by presenting you as a lower-risk, well-prepared applicant to potential lenders.

Looking to Prevent Loan Rejections? Achieve Approval through Fundability.

Lenders typically evaluate three key factors: collateral, personal credit, and cash flow, known as the three C’s. Possessing at least one of these elements can significantly enhance your chances of securing a business loan. For instance, having robust cash flow can qualify you for revenue loans from platforms like Square and PayPal. If you have a good personal credit score, particularly 680 or above, you can access credit lines. If your personal credit isn’t strong, partnering with a guarantor who has a better credit score is an option.

Looking to Prevent Loan Rejections? Consider Gaining Approval through Collateral.

By offering solid collateral, you can secure various types of financing such as accounts receivable funding, purchase order financing, equipment financing, and commercial real estate financing. Collateral can take many forms, including 401(k) plans, stocks, bonds, vehicles, accounts receivable, real estate, and other assets.

Looking to Prevent Loan Rejections? Focus on Gaining Approval with Strong Personal Credit.

Those with good personal credit can access the Credit Line Hybrid program. This option can offer up to $150,000 in credit line approvals, without consumer reporting and with some industry reporting. The amount approved typically matches your current credit limits. To qualify, you should have had fewer than five inquiries on your credit report in the past six months. It’s also important to have established credit, with open revolving accounts currently reported on your credit report and balances below 40% of your credit limits. Lenders usually require personal credit scores of at least 680. Many of our exclusive unsecured lending options offer highly competitive introductory interest rates, sometimes as low as 0%, for the first 6-18 months. After the introductory period, rates generally start at 5% or higher, with the exact rate depending on the risk.

Looking to Prevent Loan Rejections? Explore Approval Options with Collateral and Cash Flow.

Having both credit and cash at your disposal can qualify you for term loans, lines of credit, and SBA loans.

To fix personal credit, follow these steps: 

  • Review Your Credit Report: Obtain a copy of your credit report from major credit bureaus and check for any errors or inaccuracies.

  • Dispute Errors: If you find errors, dispute them with the credit bureaus.

  • Pay Bills on Time: Late payments can significantly hurt your credit score. Ensure all bills are paid on time.

  • Reduce Debt: Work on paying down outstanding debts, especially those with high interest rates.

  • Keep Credit Card Balances Low: High credit utilization (the ratio of your credit card balance to your credit limit) can negatively impact your score.

  • Avoid Opening New Credit Accounts Unnecessarily: Each time you apply for credit, it can cause a small dip in your credit score.

  • Don’t Close Old Credit Accounts: Keeping older accounts open can help your credit score by showing a longer credit history.

  • Manage Credit Wisely: Use credit responsibly and avoid behaviors that could lead to high debt or missed payments.

  • Consider a Secured Credit Card: If you have poor credit, a secured credit card can help you rebuild it.

  • Regularly Monitor Your Credit: Keep an eye on your credit score and report to track your progress and catch any issues early.

Summary 

Business loans are contingent on the lender’s confidence in your repayment capacity, necessitating the demonstration of this ability. Consistent documentation, proper licensing, an EIN number, strong business credit, collateral, personal credit, and cash flow all serve to assure lenders of your capability to repay.