Unless you've won the lottery or come into a large inheritance, odds are that if you're looking to open or grow your own business, you'll need to take out a loan first. Unfortunately, the odds also put you at a nearly 50-50 shot of having your application being rejected. According to the 2014 Small Business Credit Survey, approximately half of all small business loan applications filed in the first half of 2014 were denied by banks.
Having your application denied can be discouraging, as rejection tends to be, but you shouldn't let it dismay you from trying again. There are a number of reasons why small business loans may be rejected, including a lack of collateral, ill-prepared paperwork or applying at a bank that is too risk-adverse toward small business lending. Courtesy of the personal financing website NerdWallet, here are a couple more reasons why your loan may have been shot down:
- Asking for a small loan when the bank prefers larger ones: While you may think you're mitigating your risk in the eyes of a bank by asking for a smaller-sized loan, the truth is many banks prefer to underwrite larger loans. Small business lending is often construed by banks as being inherently risky anyway. As a result, lenders will often gravitate toward the bigger loan requests as it becomes more profitable for them than smaller loans and doesn't require any additional processing time or costs to do so.
- Weak or no credit: Just as your credit score can influence your ability to take out affordable loans for homes and cars, it can also impact your eligibility for commercial lending. Low credit scores, or having no credit history at all, is one of the most common reasons a bank may reject a small business loan application. If this applies to your situation, you can turn things around by making more timely payments, spending under your limit and keeping credit accounts open. Additionally, consider requesting a credit report from each of the three major credit reporting bureaus: TransUnion, Experian and Equifax. You're entitled to one free credit report from each bureau per year, and keeping tabs on your credit activity can help keep you better apprised of whether your credit score may be putting you at a lending disadvantage.
If your loan request was denied by a bank, don't count yourself out yet. Growth Capital Corp. provides long-term, fixed-rate, affordable loans for small businesses. We review each application on a case-by-case basis, regardless of any prior rejections by a bank. If you're an entrepreneur looking for a smaller loan, then our Community Advantage Loan, which can run for as little as $50,000, may be perfect for your needs.