Common reasons business loans and lines of credit get rejected and what you could do next
Explore why a business loan or line of credit may be denied and find tips for how to proceed. Presented by Chase for Business.
- Business loans and lines of credit can be denied for several reasons, including poor business or personal credit, low cash flow, a high debt ratio and the age of a business.
- It may be helpful to monitor your cash flow, debt and business and personal credit scores if you are planning to apply for a loan or line of credit.
- While there’s no set wait period for reapplying for a business loan or line of credit, you might want to wait until you’ve had time to work on the factors that contributed to the initial denial.
Being declined for a business loan or line of credit can be disappointing, but it often doesn't mean the door is closed. There are strategies that may help you receive approval the next time you apply.
In this article, we’ll cover common reasons for denials and ways to potentially improve your eligibility for approval the next time you apply for a business loan or line of credit.
Reasons business loans or lines of credit may be denied
There are several reasons why a business loan or line of credit application may be denied. Common reasons include:
- Poor credit history: For small businesses, lenders often look at the business owner's and personal guarantor’s credit score and the business’ credit scores. A history of late payments or previous defaults can negatively impact your application.
- Insufficient cash flow: Lenders often want to know that a business generates enough consistent revenue to cover its daily operations and the new payment amount of the loan or line of credit. If cash flow is tight, inconsistent or negative, lenders may view the loan or line of credit as too risky.
- Too much existing debt: If a business already has multiple loans, lines of credit or high credit card balances, its debt-to-income (DTI) ratio might be too high for many lenders. This is also applicable for guarantors’ personal debt.
- Short time in business: Newly-formed businesses and majority ownership changes may face denial because they lack a proven track record. Banks may require a business to have been operating for at least 2 years before considering a loan or line of credit application.
- Lack of collateral: Many commercial loans require collateral (such as real estate, equipment or inventory) to secure the loan. If a business doesn't have sufficient assets to secure the loan, the application may be denied.
Steps to take if your business loan or line of credit application was not approved
To qualify for a loan or line of credit, it may be helpful to know your finances inside and out, including the value of your business. There are a few ways to review your financial position and start making improvements.
Let’s examine these ways more closely.
Increasing cash flow
Cash flow challenges are one of the most common reasons businesses seek financing. There are many ways to strengthen your cash position, from adjusting payment terms with vendors to reviewing your pricing strategy.
A strong cash flow statement also may help you make more informed financial decisions and improve your eligibility of qualifying for a loan or line of credit. Calculating your cash flow can help you get a clearer picture of your business’s financial health. In addition, small operational changes may help increase the cash your business has on hand.
Managing existing debt
One factor that may lead to a denial is your existing debt. Managing and reducing debt may help you receive approval.
There are a few ways for businesses to manage and reduce debt:
- Boosting your debt-service coverage ratio: Lenders usually want to see that your business income comfortably covers your debt. That typically means your business needs to generate enough profit to pay existing debts plus any new loan or line of credit payments. Increasing your debt-service coverage ratio (DSCR) may be a helpful strategy for approval.
- Rightsizing your credit request: The right amount of credit may help fuel growth, but too much may hold you back. Lenders may look at how much you're requesting in comparison to your business revenue and needs.
- Paying down debt: Lowering your debt (both business and personal) may help improve your eligibility for approval. When you’re looking to pay down your debt, there are two common strategies: the debt snowball method and debt avalanche method. Either approach may work depending on your financial situation, especially when you're managing more than one debt at a time.
Monitoring your business credit score
Lenders often monitor both your business and personal credit score during the loan or line of credit approval process. While many consumers are familiar with their personal credit scores, business credit scores work a bit differently.
Business credit scores are maintained by three major credit bureaus:
- Dun & Bradstreet®
- Experian®
- Equifax®
Each bureau may calculate your score differently, which is why businesses may have multiple scores at any given time. Several factors influence your business credit score, including payment history, credit utilization, length of credit history and the size and type of your business.
Unlike with personal credit, reporting agencies may not be required to provide free access to your business credit reports, making it even more important to stay informed and proactive.
Some lenders offer tools to view your business credit scores if you’re a current customer. For example, Chase business checking and business card customers can enroll in Chase Business Credit Journey℠. The tool shows and monitors two business credit scores: Dun & Bradstreet® Small Business Financial Exchange Score and Dun & Bradstreet® Delinquency Predictor Score. It includes resources to help you build your credit knowledge from the ground up, including education to better understand what factors into your scores and email alerts to monitor your business credit over time.
Keep in mind that your personal credit score may still be part of the equation, especially if you’re a sole proprietor. Lenders often look at both when evaluating a business loan or line of credit application, so strengthening your personal credit may work in your favor too.
Improving credit
A business credit report is a detailed document that shows your company's credit history and current credit standing. Lenders, suppliers and other stakeholders often use it to assess your creditworthiness and financial stability. It includes your business credit score along with other factors such as payment history and credit utilization.
A good credit score can be a strong indicator of your business’s financial health. Strong credit may make it easier to qualify for loans or lines of credit—and to secure lower interest rates. Lenders often prefer to see a long, stable credit history. Newer accounts may suggest higher risk, whereas established accounts often signal more reliability. If your company isn’t very established, there are some ways to build business credit even as a new business.
When to reapply for a business loan or line of credit
While there's no set waiting period, financial experts often recommend taking at least a few months to work on the factors that led to the denial. It usually takes over a month before your credit score may show any signs of improvement, and bigger credit score improvements may take 3 to 6 months of steady, positive steps.
When you're ready, you may want to use a small business loan or line of credit application checklist to help prepare. A Chase business banker also can review your specific situation to help you work toward getting loan-ready.
Frequently asked questions
Does a business loan or line of credit denial hurt my personal credit score?
The denial itself does not hurt your credit score, but the hard inquiry from the lender's credit check may cause a temporary dip.
How can I find out exactly why my loan or line of credit was denied?
Lenders are required by the Equal Credit Opportunity Act to provide an Adverse Action Notice detailing the specific reasons when an application is denied.
Can I apply with a different lender immediately after being denied?
While you can apply with another lender right away, doing so without addressing the underlying reasons for your initial denial may lead to another rejection. It is usually helpful to review your financial health and explore alternative financing options like SBA microloansOpens overlay or business credit cards first.
How long should I wait before reapplying for a business loan or line of credit?
It may be helpful to wait at least a few months before submitting a new application. This may give you enough time to work on improving your credit score, increasing cash flow and reducing existing debt.
Chase business checking customers and Chase Ink® cardholders: Check your business credit scores anytime with Chase Business Credit Journey®. There’s no additional cost and it won't impact your credit.
