Top 5 Reasons Why Your Business Loan Application Gets Declined
You just submitted your business loan application, and it was declined.
“Why was it declined, and how can I get approval?”
Let’s look at the top five reasons your business loan application can get declined and how to increase your chances of securing approval.
1. Missing Documents or Information
Forgetting a document or specific information is one of the most common reasons your loan gets denied.
Secure the following documents before you apply for business loans:
- Bank statements
- Tax portal report from the Australian Taxation Office
- Business registration documents
- A detailed business plan with cash flow projections
- Financial statements, including a balance sheet of profit and loss statements
You must also provide additional documents for other trusts and self-managed super funds.
2. Cash Flow Limitations
When applying for loans, you must be able to show your business’s financial situation and that you’ll be able to repay the loan. This can affect how you manage your cash flow and your ability to repay loans.
Understand your business’s revenue stream and how to improve your business plan for a more steady cash flow.
3. Too Much Existing Debt
Most lenders prefer if applicants have a debt utilisation rate of under 30%. If your rate is higher, applying for business financing might be risky.
Repay your other debts and stick to a stable repayment schedule. Lenders are more likely to approve if you make loan repayments punctually.
4. Insufficient Time in Business
Lenders often require a trading history of around six months to a year. This can be challenging, especially if you’re a new business.
Build your financial history and apply once you’ve gained experience.
You can also research loans for start-up businesses or explore other funding avenues through private investors or government funding if eligible.
5. Damaged Credit Score
Your credit score describes how creditworthy you are and the risk you pose to your lender. Bankruptcy or late repayments can damage your credit score.
Check your lender’s requirements before applying.
When to Apply for a Business Loan
Given your business needs, there are many reasons to apply for a business loan.
A loan can cover almost any expense, like debt consolidation, funding new equipment and stock, and improving your cash flow.
How to Find the Right Business Loan
There are a few things to consider before sending out a business loan application to get the right loan.
Note the following while looking for a loan:
- How much you need to borrow
- The term of your loan
- The type of loan you need
- Security measures you can offer and how they affect the interest rate
- If your business can repay the loan, its interest, and additional fees
How to Apply for a Business Loan
The business loan application process entails:
- Submit your application and the necessary documents.
- Get approval and withdraw your cash.
- Repay the loan within your given schedule.
Depending on your circumstances and the lender’s terms, additional steps can be added.
Primary Business Loan Requirements
The usual requirements include:
- Identification (not needed for an existing customer)
- Annual financial statements, preferably prepared by an accountant
- Banks statements
- Proof of personal income statement, if you have income unrelated to your existing business
You may be required to submit extra documents, especially if you’re a startup or the lenders need more proof regarding your business income.
You may also need to pay additional establishment or application fees.
Questions You Must Be Prepared to Answer
You might be asked the following questions:
- What’s your business’s growth potential?
- Who are your existing customers?
- What do you supply?
- Where do you sit in your market?
- How well do you understand your industry?
What Lenders Look For in a Loan Application
Lenders often look for the following when approving loans:
- Business Structure: You must submit business activity statements to help your lender assess your business loan application.
- Financials: The lender should have a clear view of your business’s financial position to determine if you can meet your existing and proposed repayments.
- Security: Secured loans may require additional collateral to secure the loan.
- Experience: It’s best to show business lenders you have business experience. This informs them you’ll be stable and have the ability to repay your loan.
They can also ask for additional bank statements and documentation to assess your financial situation. Some may even require approval from company directors.
Tips to Improve the Chances of Business Loan Approval
Here are a few more tips to help you fit the business finance eligibility criteria:
- Prepare your business plan and financial statements beforehand
- Have all details double-checked
- Research what you need
- Ensure you can pay additional fees within your loan term
- Consult a specialist or adviser
Common Financial Products and Loan Types
These are the most common business finance options:
- Term Loans: You can choose between a secured loan that requires collateral or an unsecured loan. These can vary in loan terms, interest rates (fixed or variable interest rate), fees, and security. You can even secure variable-rate loans more easily from lenders like Lumi.
- Line of Credit: It provides a specific amount of money you can withdraw anytime and will need to be repaid along with its interest.
- Rent-to-Buy: You pay the initial deposit for stock or goods and lease until you can fully pay it off.
- Commercial Bill: It’s a commercial loan for short-term funding, like inventory.
- Factoring: This lets you buy your outstanding invoices at a discount.
- Overdraft Facility: It provides working capital for short-term financing based on your credit history.
- Invoice Finance: Similar to factoring, but your invoices or accounts remain with your business.
- Chattel Mortgage: It lets you own the asset you loan for and make regular ongoing payments. You can lower these instalments by making a larger final payment.
- Fully-Drawn Advance: This provides access to capital for your long-term investments.
- Commercial Hire-Purchase: You can purchase a good using an initial deposit and reduce instalments by giving a larger final or balloon payment.
FAQs
We’ve gathered the most common questions about business loan applications to help you with your research.
Where Can I Get an Unsecured Business Loan?
Lumi has many reliable loan options for corporate borrowers of different backgrounds. This type of business loan is usually the best option for quick access to cash.
They have an easy online business loan application and can approve you within the same business day.
Do Loans Come With Additional Fees?
Additional fees can depend on your lender. They can have fees for establishing your loan on top of maintenance fees.
Other lenders can also have early repayment fees and early termination fees during the term.
Take note of these ongoing fees before applying for business loans to save money in the long term.
Conclusion
Any small business can have their loan applications denied for many reasons.
While securing approval can depend significantly on your own circumstances, you can still ask a business lending specialist for professional advice on getting approval and the best deals.
