Common Reasons for Rejection and How to Improve Your Chances

When applying for business financing, including lines of credit, working capital loans, or equipment financing, there are various factors lenders consider before approving an application. While rejection can be frustrating, understanding the common reasons for denial and taking steps to improve your chances can help you secure financing in the future.

This guide will outline the most common reasons for rejection and offer tips on how to strengthen your application to increase your likelihood of approval.

Several factors can contribute to a loan application being denied, ranging from poor financial health to incomplete documentation. Below are the most common reasons for rejection and what you can do to address them:

1. Insufficient Time in Business

Many lenders, including FundLocal, require businesses to have been operational for at least 6 months. New businesses often lack a proven track record of financial stability, which increases the risk for lenders.

• Why It Happens: If your business is newly established, lenders may be hesitant to provide financing because they can’t assess your revenue consistency or cash flow.

• How to Improve: If your business is less than 6 months old, focus on building up your financial history by generating steady revenue, keeping your expenses in check, and maintaining positive cash flow. Reapply once you’ve reached the minimum operational threshold.

2. Low Annual Revenue

Most lenders, including FundLocal, require a minimum annual revenue of $100,000. Businesses that don’t meet this requirement may struggle to demonstrate they have the cash flow necessary to repay the loan.

• Why It Happens: Low or inconsistent revenue suggests that your business may not generate enough income to cover loan repayments, making lenders wary of lending to you.

• How to Improve: Focus on growing your business and increasing your revenue before reapplying. Consider cutting unnecessary expenses, improving operational efficiency, or seeking additional sources of income to boost your revenue. Demonstrating sustained growth can improve your chances of approval.

3. Poor Credit History

While FundLocal uses soft credit checks (which do not impact your credit score) for initial funding quotes, a poor credit history can still affect your ability to secure financing. This applies to both your business and personal credit, depending on the loan type.

• Why It Happens: A history of missed payments, defaults, or high credit utilization can signal to lenders that you may struggle to manage new debt.

• How to Improve: Improve your credit score by paying off existing debts, making all payments on time, and keeping your credit utilization low. If your personal credit is an issue, consider working with a financial advisor to create a plan for improving your credit profile before reapplying.

4. Incomplete or Inaccurate Documentation

Incomplete or inaccurate documentation is one of the most common reasons for loan application rejection. Missing business bank statements, incorrect financial information, or inconsistent data can delay or derail the approval process.

• Why It Happens: Lenders rely on your documentation to assess your financial health. If your documents are incomplete or don’t align with the information you provided in your application, it raises concerns about the accuracy of your financial reporting.

• How to Improve: Double-check that you’ve submitted all the required documents and that the information is accurate. Ensure that your business bank statements, tax filings, and other financial records are organized and up to date. Keeping these documents well-prepared can speed up the approval process and improve your chances.

5. Insufficient Cash Flow

Even if your business generates strong revenue, you may be rejected if your cash flow is insufficient to cover both operating expenses and loan repayments. Lenders want to see that you have enough positive cash flow to repay the loan on time.

• Why It Happens: If your business’s operating expenses are too high relative to its revenue, it may signal that you lack the liquidity to handle additional debt. Negative or inconsistent cash flow is a red flag for lenders.

• How to Improve: Focus on improving cash flow by cutting unnecessary expenses, speeding up accounts receivable, and delaying certain payments where possible. You can also improve your chances by applying for a smaller loan amount that’s more in line with your current cash flow.

6. Recent Bankruptcy or Financial Distress

Active or recent bankruptcies can make it difficult to qualify for financing. Even if your business has exited bankruptcy, lenders may view this as a sign of financial instability.

• Why It Happens: Bankruptcy, defaults, or other significant financial distress make lenders hesitant to provide new loans due to the perceived risk of repayment challenges.

• How to Improve: If you’ve recently exited bankruptcy, focus on rebuilding your business’s financial health before reapplying. Demonstrating a period of positive cash flow and financial stability post-bankruptcy can increase your chances of approval in the future.

7. Industry-Specific Restrictions

Certain industries may be considered high-risk or subject to additional regulations, making it harder to secure financing. For example, businesses in industries like gambling, cannabis, or high-risk retail may face more scrutiny during the application process.

• Why It Happens: Some industries present unique risks, such as regulatory hurdles or volatile market conditions, which may make lenders cautious about providing financing.

• How to Improve: If your industry is considered high-risk, it’s essential to present a strong case for why your business is financially stable. Provide additional financial documentation, such as profit and loss statements, or show evidence of regulatory compliance to reassure lenders.

8. High Existing Debt

If your business already has substantial debt, it may be difficult to qualify for new financing. Lenders assess your debt-to-income ratio to ensure that you can manage additional loan payments.

• Why It Happens: A high debt load suggests that your business may struggle to take on additional loan payments, increasing the risk for the lender.

• How to Improve: Pay down existing debts before applying for new financing. Reducing your debt load and demonstrating a track record of on-time payments can improve your debt-to-income ratio, making you a more attractive candidate for funding.

If your loan application was rejected or you’re preparing to apply for financing, there are several steps you can take to improve your chances of approval:

1. Strengthen Your Cash Flow

Lenders want to see that your business has enough cash flow to cover both operational expenses and loan repayments. Here’s how you can improve your cash flow:

• Reduce expenses: Cut unnecessary costs and streamline operations to free up cash.

• Invoice promptly: Ensure that clients and customers are invoiced on time and follow up on unpaid invoices to speed up cash inflow.

• Increase sales: Explore new sales channels, expand marketing efforts, or offer promotions to drive more revenue.

2. Improve Your Credit Score

Even though FundLocal uses soft credit checks that don’t affect your score, improving your personal or business credit can increase your chances of securing better loan terms.

• Pay bills on time: Ensure that all outstanding debts are paid promptly.

• Reduce credit utilization: Keep your credit balances low compared to your credit limits.

• Resolve any errors: Check your credit report for errors and dispute any inaccuracies.

3. Provide Complete and Accurate Documentation

Submitting complete and accurate financial documentation is critical to improving your chances of approval. Here’s what you can do:

• Organize financial documents: Keep business bank statements, tax filings, and financial reports up to date and readily available.

• Ensure consistency: Verify that the information in your application matches the data in your financial documents to avoid discrepancies.

4. Lower Your Debt-to-Income Ratio

If you have significant existing debt, it’s a good idea to focus on paying down your balances before applying for new financing.

• Pay off smaller debts: Reduce outstanding debts where possible to improve your debt-to-income ratio.

• Increase income: Boost your revenue by exploring new business opportunities or focusing on growth strategies.

5. Apply for a Smaller Loan Amount

If you’re struggling to qualify for the full loan amount you initially requested, consider applying for a smaller loan that better aligns with your current financial situation.

• Reassess your needs: Determine if a smaller loan can still meet your immediate needs.

• Show realistic repayment ability: A smaller loan is easier to repay and may make lenders more confident in your ability to manage the debt.

While loan rejection can be disheartening, understanding the common reasons for denial and taking proactive steps can improve your chances of approval. At FundLocal, we’re committed to helping small businesses secure the funding they need, and we’re here to guide you through the process. If you have any questions or need assistance with reapplying, don’t hesitate to reach out to our support team. We’re ready to help you succeed!