Most businesses will need to access additional finance at some point. A business loan can help with expansion, debt consolidation, boosting cash flow, or buying new equipment.
If you’re considering getting a loan for your business, you’ll naturally want to understand your chances of being accepted.
A rejected loan application can damage your credit rating and make it harder to access finance in the future, so it’s worth understanding your chances before you apply.
Can your business get a loan?
Any business can apply for finance, but the lender must be confident that you’ll be able to repay the loan before they approve your application.
All lenders set loan requirements that you and your business will need to meet in order to be eligible for funding. To determine your eligibility, lenders will check things like your credit score and financial affordability.
Credit report
Whenever you apply for any type of credit, the lender will check your credit report. For a business loan, they will usually only look at your business credit score, but they may also check your personal credit score.
Your credit score gives lenders an indication of how you have managed credit in the past. If you have a good score, it means you’ve kept up with your repayments and will be considered a low-risk borrower.
If you have a lower score, it could signal to lenders that you’ve struggled to manage credit in the past or have little credit history. A low score could discourage them from offering you a loan, as it could indicate that you will struggle to make your repayments.
Financial affordability
Most lenders will ask to see your latest company accounts as part of your application. In addition to this, they will want to see the last 3 to 6 months’ bank statements to understand whether you can afford the repayments going forward.
They may want to know your business’s turnover and what profit you generate to understand if you can afford the loan repayments alongside your other business expenses.
They may also look at your level of existing debt. If you already have other loans and credit agreements, they may decide it’s too risky to lend you any more and increase your debt further.
Use of funds
Lenders will also want to understand what you will be using the funds for. Some lenders will only finance certain purchases or activities, and they want to ensure that the funds will be used for business purposes.
This doesn’t need to be a detailed plan, but an overview will help to show the lender you’ve thought carefully about how the loan will benefit your business.
What are the most common reasons loans are rejected?
Understanding why business loans are rejected can help you avoid the most common pitfalls and improve your chances. Some of the most common reasons include:
- Low credit score: All lenders look at your credit score; if it is low, they may reject your application. A low credit score indicates that you have struggled with credit and are potentially a risky borrower.
- No credit history: If your business is new or hasn’t borrowed previously, you won’t have an extensive credit history. This means the lender will struggle to assess your creditworthiness and may be unwilling to offer you a loan.
- Lack of collateral: To get a secured business loan, you will need to provide a business asset as security. If you don’t have assets of sufficient value, you won’t be eligible for a secured loan.
- Missing documentation: You will need to provide several documents to support your application. Your application will be rejected if you fail to provide your company accounts, bank statements or a business plan.
- Not enough trading history: Many lenders specify that your business must have been trading for at least six months or longer to qualify. If your business is new, you may need to look for a startup business loan.
- Too much debt: If your business has a lot of debt or a high credit utilisation ratio (the percentage of your available credit you’re using), lenders may worry about your ability to manage more borrowing and reject your application.
Before applying, consider these reasons and identify any that could apply to your business. Take steps to rectify any issues before you start your application.
What to do if your loan is refused
If your application is unsuccessful, approach the lender to confirm the reason. Understanding why you were refused a loan will help you know what you need to work on before you try again.
It is essential not to apply again immediately without fixing these issues. Several rejected applications in a short period of time can negatively impact your credit score and make it even harder to borrow in the future.
If you still need funding but need time before applying for a loan again, there are other options you could consider, including:
- Merchant cash advance
- Revolving credit facility
- Business overdrafts
- Business credit cards
Find out more about alternative business funding options here.
Tips on improving your chances of acceptance
To give yourself the best chance of success when you apply for a business loan, follow these tips:
- Check and improve your credit score: Check your credit score and take steps to improve it if it’s lower than you expected.
- Clear outstanding debt: If possible, try to pay off some of your debt and reduce your credit utilisation ratio.
- Check your financial documents: Make sure your financial accounts and bank statements are current and in order before submitting them.
- Apply with Aurora Capital: When you apply for a business loan with Aurora Capital, we will check your eligibility and only show you loan quotes you could qualify for.
