Being rejected after applying for a small business loan can be frustrating and alarming. However, most rejections are tied to some specific issues that you may be able to avoid. Understanding why lenders say no may help you recognize potential red flags before submitting your loan application, saving time and improving your chances of approval. Many denials are related to documentation gaps, financial performance issues, or problems with how you presented risk to the lender.
By knowing what banks and online lenders evaluate, such as your business credit score, cash flow strength, collateral for secured loans, and debt service coverage, you may be able to take action now instead of being surprised later. Anticipating these potential issues gives you more control and puts you in a better position to secure the funding your business needs.
10 Potential Reasons for Business Loan Denial
Traditional lenders are the most likely to reject a small business loan application. They often lend more money than other lenders, so they have more to lose if borrowers can’t repay the debt. That’s why they enact strict eligibility requirements to avoid defaults.
That creates numerous potential reasons your application might be rejected, but knowing those reasons beforehand may help you become a more ideal borrower. Here are 10 common reasons for business loan rejection.
1. Excessive preexisting debt
One of the first things lenders look at is the amount of debt that your business has. If you have multiple existing loans or high balances on credit lines, a lender may worry about your ability to handle additional payments. This is especially true if your current revenue doesn’t comfortably support all your obligations, or if payments are already draining your cash flow.
High debt also weakens your debt service coverage, which is a key metric lenders use to determine whether your income is sufficient to pay existing plus new debt. When this ratio is low, lenders see greater risk and may deny funding.
2. Bad credit score
It’s virtually impossible to find a lender who won’t look at your personal and business credit scores. Both scores highlight how reliably you’ve repaid debt in the past, and that data helps lenders determine if they’ll get a return on their investment in your company. While specific score requirements can vary from one lender to the next, they generally stay within a certain range. For example, SmartBiz Bank requires a credit score of at least 640 for SBA loans.
By keeping your credit score at 650 or higher, you should be able to meet this requirement with any lender. If you’re not quite at that level, you can quickly boost your score by making on-time payments and paying off some debt.
3. Unequal collateral
Collateral refers to any assets of sufficient value that the lender can sell to recoup their losses if you can’t repay the loan. If the value of your collateral isn’t near or equal to the value of the loan, the lender may reject your application.
Something else to consider is the type of collateral you offer. Depending on the type of loan you apply for, the lender can require money, equipment, future revenue, or your personal home or car. When you apply for a loan, make sure you understand the terms surrounding collateral, and ensure that your assets are roughly equal in value.
4. Insufficient debt-to-income ratio
Your debt-to-income position is a major factor in whether lenders approve your loan application. If your business already carries significant debt and your cash flow is tight, lenders may worry about your ability to take on additional payments. You’re not expected to have zero debt, but lenders do want clear evidence that you can comfortably manage existing obligations while repaying new financing.
A lender may calculate your Debt-Service Coverage Ratio (DSCR) to see whether your cash flow can comfortably support loan payments. DSCR is typically measured as Net Operating Income ÷ Total Debt Service. For example, imagine that your business brings in $180,000 in net operating income per year, and your annual debt obligations, including existing loans, interest, and the proposed new loan, total $150,000. Your DSCR would be 1.2 ($180,000 ÷ $150,000 = 1.2). Many lenders may look for 1.25 or higher, so even though you’re close, you may still be declined because your debt load leaves too little cushion for economic fluctuations or unexpected expenses.
5. Decreasing annual revenue
Lenders will closely review your business’s revenue trends to determine whether your company is growing, shrinking, or stable. If your annual revenue shows a downward pattern over the last several years, it can raise red flags. From a lender’s perspective, shrinking revenue suggests higher risk because it may indicate weakening demand, increased expenses, or deeper operational problems that could affect your ability to repay the loan.
If you are currently experiencing a period of declining revenue, be prepared to explain that to your lender. While downward trends don’t automatically lead to rejection, they certainly do make it more complicated to get a loan for the full amount that you’re requesting.
6. Unreliable industry
Financial institutions will have fewer incentives to lend you money if your business is in a market with a high rate of failure. That isn’t to say it’s impossible, but your application will be held to a higher standard, making it more difficult to qualify. While switching to a more reliable industry may not be feasible, there are lenders out there who cater to more volatile industries.
7. Limited customer base
Lenders aren’t just interested in the amount of money you make versus what you owe. They have a vested interest in the stability of your profits, so they’ll likely take a close look at the customers you serve.
If your business only caters to one type of client, what happens when outside events disrupt that demographic? Catering to a limited number of clients can promote loyalty to your business, but diversifying your customer base points to less financial risk overall.
8. Incomplete application
It’s usual for applicants to miss some of the required information on an SBA loan application. After all, these applications typically require a lot of information. Many business owners underestimate how much time and effort the process takes, which can lead to missing key information that lenders need to make a decision.
If a lender rejects your application because it’s unfinished, it’s usually a very simple issue to fix. Commonly missing items include updated bank statements, personal and business tax returns, and accurate financial statements. While some banks require a detailed business plan, SmartBiz does not, so if you don’t have one of those ready, we may still be able to lend you the funds that you need.
9. Limited or nonexistent credit history
When a lender looks at your credit history, they’re trying to determine how responsible you’ve been with repaying debts in the past. If you lack an established credit history, then the lender has no way to verify your ability to repay the money you borrow. (Your credit history documents your lifetime credit usage, whereas your credit score is a brief numerical snapshot of your history.)
Starting a credit history for your new small business is generally relatively simple. Just obtain a credit card for your business, use it regularly, and pay off the debt on time. Building it to the point of qualifying for a loan could take some time, but your card can help to get you started and provide some funds in the meantime.
10. Poor business performance
It’s hard to get a personal loan without a source of income. When dealing with SBA loan applications, it’s unreasonable to expect a lender to let a struggling business borrow money. Ultimately, lenders provide funds to businesses that they expect will be able to repay the loan with interest. If your financial statements show a prolonged period of financial struggle, you’re unlikely to be approved for a loan.
Poor performance doesn’t always mean that a business is failing. However, it does make the business seem less desirable to a lender. In some cases, weaker performance won’t result in an outright rejection but may limit what you qualify for. You might be offered a smaller loan amount, shorter repayment term, or higher interest rate to offset the lender’s perceived risk. Strengthening your financial records, improving profitability, and documenting growth plans can help improve your approval odds in the future.
What lenders evaluate beyond the numbers
While financial metrics are critical, lenders also assess qualitative factors that indicate the stability and reliability of your business. They consider the owner’s experience and industry knowledge, as well as how long the business has been operating. Lenders may also consider how popular the industry is. If you’re applying for an SBA loan for a local business in a small town that doesn’t have much demand for the goods or services you provide, it will be harder to obtain the funds you need.
Lenders may closely review the quality and completeness of your documentation, including bank statements, tax returns, and financial statements. Consistency across all financial records is also essential, as discrepancies can raise red flags. By understanding these factors, business owners can better prepare their loan applications and strengthen their chances of approval.
What can you do if your loan is denied?
Being rejected for a loan may seem like hitting a brick wall. But if applying to a traditional lender doesn’t work, plenty of options are available to help you secure funding.
Look at a different loan type
If you’re not having much luck with traditional lenders, alternative lenders may be a better financing option for your business. Generally, alternative lending plans pay out less money while presenting fewer hoops to jump through to qualify. Additionally, alternative financing often has reduced processing time for applications, meaning you can get your money faster.
However, alternative lending does have significant drawbacks. Alternative loan plans often come with shorter lending terms, extra fees, and higher interest rates that lead to larger monthly payments.
Find out why the loan was denied, then fix it
Just because a lender denied your application once doesn’t mean it will be rejected next time. There are numerous reasons why the lender may have denied your loan, so ask why. You may be able to acquire the funding you need as long as you reapply with the problems fixed.
Strengthen your application
Fixing your business's old issues is a good first step, but it’s also essential to give it new strengths to help it stand out. Think about it like this: You probably won’t be able to reapply right away after a bank denies your application. That period between applications is time you can use to improve your business in areas where it may have been lacking before.
You could draft a more detailed business plan, improve your personal and business credit scores, and expand to new clientele. This way, you’re more likely to qualify next time.
A long-term partner may help your business grow
SmartBiz Bank is more than a lender. We are a long-term partner committed to helping small businesses prepare for the next phase of their growth. By organizing documentation, maintaining accurate financial records, and understanding lender expectations, business owners are better equipped to approach loan applications with confidence.
Working proactively with a trusted banking partner ensures you are ready when the need for funding arises, while also building a foundation for sustainable growth. Thoughtful preparation and a strong relationship with your bank may help make the difference between a smooth approval process and avoidable delays.
