Understanding the reasons behind your loan rejection paves the way for a successful future application

You’re finally ready.

You overcame the initial stage of doubts and uncertainties, and through it all, your business idea persevered. You’re now ready to put your business idea and plan into motion. All you need is a little bit of financing to get things started, and what better way to get that than through a SME Business Loan? So, you proceeded with your research. You had all your paperwork in place and began the application process. You were full of hope until all of your applications were being turned down, one by one.

You might be quite discouraged by now. Don’t be! It’s no secret that small businesses can have a hard time getting funding and the reasons stem from various unique challenges that go beyond the existing economic condition. In this article, we will identify and explore 7 reasons behind your SME Business Loan rejection and ways to overcome them.

1. You Have Poor Credit Score or Lack of Credit History

This is one of the most common reasons why a lender may reject your business loan application. A business credit score is one of the most important deciding factors when it comes to accessing funding to support and grow your business.

Lenders typically determine your creditworthiness or the probability of on-time repayment by reviewing the credit lines and past payment history in your personal and business credit reports when making approval decisions. Small business owners with insufficient business credit history often rely on their personal credit score reports when applying for a loan.

Before applying for any business loans, it is advisable to review both your business and personal credit reports. If you have less than stellar credit history on both fronts, take proactive actions to repair them or build them up. However, in case you are running out of time and in urgent need of a loan, there are more options for you out there than ever before.

2. You Have Insufficient Cashflow

Aside from credit reports, lenders will also look at your business cash flow analysis when deciding whether to approve your loan application. Your cash flow analysis indicates your loan repayment capacity after covering operating expenses. Poor cash flow is not just a major cause of business failure, it also reflects your business subpar cash management skills; hence, affecting the confidence of lenders.

You can improve your business cash flow by monitoring your cash flow weekly, cutting unnecessary expenses, and maintaining proper invoicing – don’t let invoices drag out to 60, 90, or 120 days past due.

3. You Don’t Have Sufficient Collateral

Business loans are often secured with collateral. Collateral is defined as an asset that has value, it can include the assets of a business or the owner. The main reason traditional and licensed lenders require collateral for small business loans is because small business lending is a volatile industry, lenders are looking for ways to reduce and protect themselves from potential financial risks of providing a loan.

Although you don’t need collateral to apply for all small business loans, it can be useful to secure the loan you want with favourable terms. If you don’t have enough collateral or lack the right type of collateral, you may get turned down. If this is your situation, look for alternative sources of financing such as unsecured loans.

Check this out if you want to know more about the difference between secured and unsecured business loans.

4. Your Business Is Deemed Risky

Some industries are considered high-risk and are generally avoided by traditional lenders. Restaurants, construction, and agriculture as well as “vice” industries such as casinos and alcohol manufacturing are all deemed as “high-risk” ventures because of their inconsistent revenue, highly competitive nature, and in the case of vice industries – their precarious relationship with the law.

If you operate within an industry deemed risky by lenders, that does not mean that your journey to acquiring a loan has to end here. Some alternative lenders have specialist products catered specifically for these types of industries. Our Secured Loan solutions can be fine-tuned to cater to your industry funding needs.

5. You’re Too Early into Business

Businesses in their nascent stage tend to find it more difficult to get approval for their SME business loans in general. Lenders look at credit history, past business performance records, and market experience when approving a loan. Young businesses lacking three of the aforementioned criteria, often face rejection when applying for business loans.

But don’t give up. Being a new player on the block doesn’t mean that your business cannot access funding. You can always turn to alternative channels such as crowd-funding, grants or small business loans offered by the government to secure the funding you need.

6. Your Application or Paperwork Is Incomplete

This is, perhaps, one of the most overlooked reasons SME business loan applications are denied. The application process for business loans is lengthy and tedious. They are more complicated as compared to personal loans. Banks and lenders require a long list of supporting documents from business owners such as a business plan, three to five years of business and personal tax returns, financial statements/projections for the business, business bank account statements, and your personal and business credit reports. They may also want to review legal documents related to your business such as contracts, leases, licenses, permits, and corporate documents.

Many time-strapped business owners often spend 30 or even more hours on just a single loan application! Understandably, it’s hard to put the blame on you if your fail to complete your application correctly. The solution to this problem is easy in comparison to others – get your paperwork in order before applying again!

7. You’re Not Asking For Enough Money

If you’re applying for a business loan from a bank, you are more likely to obtain the loan, the more money you ask for. For banks, the cost of servicing small loans is just not worth the hassle. It costs them about the same amount to process RM50,000 loan as it does a RM1 million loan. This is why you generally can’t get business loans for small amounts of money from a major bank. Apart from that, small business loans are also inherently riskier than large business loans or even consumer loans.

Understand your business financial needs and when you apply again, ask for a larger loan amount. However, if you don’t need more than you already asked for and are unwilling to take on a larger loan, look for alternative financing sources, such as a micro-lender or private licensed money lender that can provide you with a smaller loan.

Want to know if you’re financially eligible for a business loan? Talk to our advisor to find out more.

Avex Credit is a licensed money lender in Malaysia under the purview of the Ministry of Housing and Local Government and governed through Money Lenders Act 1951 and Money Lenders Act (Amended) 2003. We provide a variety of personal, mortgage and business loans that are tailored to meet your specific needs.