Why was my business loan rejected?

If you’ve been turned down for a business loan, you might feel frustrated, concerned and disappointed. But it’s important to find out why your application was rejected so you can take the necessary steps to ensure your next application is successful. 

Reasons why you might be refused a business loan

Some of the most common reasons lenders reject business loan applications include:

1. Poor credit score

Lenders look at your credit record to determine your creditworthiness and to help them assess whether you can pay back your loan. If you have a poor credit score, this indicates you’ve had problems repaying debt in the past. Perhaps you’ve missed payments or even defaulted on a previous loan.

This can make lenders feel uneasy about letting you borrow again in case history repeats itself.

2. Lack of credit history 

If your business is new, it won’t yet have much of a credit history, and this can be another reason for rejection. Lenders have no way of determining the creditworthiness of your business, and this can deter them from letting you borrow. 

Be aware that lenders often look at your personal credit history if your business has a thin credit file.

3. Limited trading history

Some providers prefer to lend to businesses that have been trading for several years, while others ask for at least six months to a year of trading. 

If you’re looking for funding for your startup, you could find it harder to qualify for a business loan – although, in this situation, you could look into startup business loans. 

4. Insufficient annual turnover

Similarly, if you don’t meet the minimum annual turnover requirement, a lender could turn you away. Lenders set these requirements to ensure that businesses can repay the loan. 

5. Not enough collateral

If you apply for a secured business loan, you must put forward an asset, such as property or equipment, as collateral. This acts as a safety net for the lender – if you fail to repay the loan, the lender can sell the asset to recoup its money.

However, the value of your asset must meet or exceed the amount being loaned. If you don’t have sufficient assets, your lender could reject your application. 

6. Missing information

If you fail to include important information or documents with your application, you could miss out on the funds you need. Most lenders want to see a strong business plan, personal and business bank statements and tax returns, profit and loss statements and financial projections to demonstrate that you can afford the loan.

7. Too much existing debt

Having too much existing debt can also result in a loan rejection, as lenders may have concerns about your ability to repay it. A high credit utilisation ratio (the percentage of total available credit you’re using) can suggest you’re struggling with your finances.

What to do if you’ve been refused a business loan

If you’ve been refused a loan, it’s worth asking the lender why (if you don’t already know). It might be due to having a low credit score or failing to meet the minimum annual turnover requirement, for example.

Check for mistakes in your application form and get hold of a copy of your personal and business credit reports to check for errors. If you spot any mistakes, contact the credit reference agency to get them corrected. 

How to improve your chances of getting a business loan

To give yourself a better chance of success next time around, follow the steps below:

• Improve your credit score: Paying bills on time, filing full company accounts, and asking suppliers to share your payment history with credit reference agencies can all help you do this

• Pay down debt: Paying down existing debt and reducing your credit utilisation ratio can make you more attractive to new lenders

• Check eligibility criteria carefully: There’s no point applying for a business loan you simply don’t qualify for. Make sure you are eligible for a business loan by checking minimum trading and annual turnover requirements before applying

• Get your financial statements in order: Make sure your bank statements, company accounts and financial projections are up to date and ready to hand over before applying for a business loan

• Provide sufficient collateral: If applying for a secured loan, you need to ensure the assets you’re using as collateral are suitable. 

• Open a business bank account: Having a business bank account in the name of your business can boost your chances of success – your bank might even offer you a business loan

• Space out credit applications: Try to avoid applying for credit too often as this can make you look desperate for credit. If you can, space out applications by three to six months

Exploring alternative options to business loans

A business loan isn’t the only way to get finance for your business. There are plenty of alternative options to explore, and one of them could potentially work out better for your business. These include:

• Business credit cards: A business credit card provides a flexible way to borrow funds up to your credit limit as needed. Some also offer rewards such as cashback or air miles

• Business overdrafts: Some business bank accounts include an overdraft that you can dip into as required. However, many charge high interest rates. 

• Government grants: It’s worth checking whether you qualify for a government grant as you won’t need to pay the money back. Search for business grants in your area on Gov.uk

• Crowdfunding: Using a crowdfunding platform enables you to raise money for your new business from several investors. Equity crowdfunding involves selling equity in your business in return for investment

• Angel investors: These high-net-worth individuals invest their own funds into a small business in return for a minority stake. Angel investors can also offer valuable business support

Find out more in our guide on how to raise money for a business without a loan.