6 Surprising Reasons Why You Keep Getting Denied for a Small Business Loan

By Faith Stewart

If you have okay credit and you are still having trouble getting a business loan, you are probably very confused. You may be wondering why you are being denied for a small business loan.

Lenders do not necessarily have to tell you, and it may not have anything to do with your credit score. On the other hand, it may have everything to do with your credit score—just not the one you think.

Strong fundability vital to business loan approval

Fundability is a business’s current ability to get financing. Sounds easy enough, right? Here’s the thing: there are over 100 factors that affect the fundability of your business. Some of them are obvious and easy to fix; others are not so obvious and can be very difficult to fix.

Fundability is like a giant puzzle, but some of the pieces are larger than others. If your larger pieces are in place, the smaller pieces will not matter so much when it comes to the big picture. However, if you are having trouble with your larger pieces, those smaller pieces can make all the difference when it comes to loan approval.

So, the moral of the story is that all the pieces count, and you need to do all you can to make sure each piece is in place. Why are you being denied for a small business loan? Maybe one of these fundability issues is causing problems.

6 possible reasons you've been denied for a small business loan

1. You do not have a fundable foundation

The foundation of your business refers to how your business is set up. If it is not set up to be fundable, lenders will deny you every time. Your business has to be set up to appear to be a fundable entity separate from you, the owner. If you do this from the beginning, it’s faster and easier, but it’s never too late to do it.

The fundable foundation is like a puzzle within a puzzle; it’s a big piece of fundability made up of a lot of smaller pieces. What does a fundable foundation consist of?

Contact information

The first step in setting up a fundable foundation is to ensure your business has its own phone number and address. The address needs to be a physical address where you can receive mail—a P.O. box or UPS box will not work. You also need a business phone number listed in the 411 directory.

Employer Identification Number

The next thing you need to do is get an Employer Identification Number (EIN) for your business. This is an identifying number for your business that works similar to how your Social Security number works for you personally. Sole proprietorships and partnerships often just use their SSN. This, however, looks unprofessional to lenders, and it can cause problems when you are trying to establish and build a business credit profile that is separate from your personal credit profile.

Get an EIN for free from the IRS.

Incorporate

Incorporating your business as an LLC, S corporation, or C corporation is important. It doesn’t guarantee approval, nor does not incorporating guarantee denial. However, it lends to the legitimacy of your business in the eyes of lenders, not to mention that it also offers some protection from liability. Be sure to discuss with your attorney or tax professional which option will work best for your business.

Business bank account

A separate, dedicated business bank account is important. Many lenders require it, and it helps with the general operations in a number of ways. You cannot get a merchant account to accept credit card payments without a business bank account, and it also aids in keeping business expenses separate from personal for tax purposes.

Other elements of a fundable foundation include:

• Licenses. Make sure you have all the licenses you need to operate legally.
• Website. A professional business website is important. Yes, lenders may look. It should be hosted on a paid platform.
• Business email address. It should have the same URL as your business website. Do not use free email like Gmail or Yahoo.

2. You don't have an established business credit report, or you have a bad one

Did you know your business could have its own business credit report? Most business owners realize this, but what they do not realize is that it is vastly different from personal credit, right down to how you get it. It does not happen on its own; you have to intentionally work to establish and build a business credit profile. The great part is, having a fundable foundation is the first step.

A business credit report is much like your consumer credit report. It details the credit history of your business. It is a tool that lenders can use to help determine the creditworthiness of your business.

The main business credit reporting agencies are Dun & Bradstreet, Experian, Equifax, and FICO SBSS. Since you have no way of knowing which service your lender will choose, you need to make sure all of these reports are accurate and current.

Other areas that can affect your credit score:

“Secret” business data agencies

In addition to the agencies that directly calculate and issue credit reports, there are other business data agencies that can affect those reports indirectly: LexisNexis and the Small Business Finance Exchange are two examples of this. They gather data from a variety of sources, including public records. As a result, they have access to information you probably do not realize could affect your ability to get a business loan.

For example, data relating to automobile accidents and liens is out there for lenders to see. You cannot access or change the data these agencies have on your business, but you can ensure that any new information they receive is positive. Enough positive information can help counteract any negative information from the past.

Identification numbers

There are other identification numbers that you need in addition to an EIN. Each business credit reporting agency (CRA) has a number that it uses to identify your business. However, typically you are assigned a number. One notable exception to this is the D-U-N-S number used by Dun & Bradstreet. As it is the largest and most commonly used CRA, you definitely need this number.

You have to apply for a D-U-N-S number, and the process is fast and free. If a lender tries to pull your report from Dun & Bradstreet and you do not have one, it will not bode well.

Business credit history

In addition to your business credit score, lenders will look at your business credit history. They want to know:

• How many accounts are reporting payments?
• How long have you had each account?
• What type of accounts are they?
• How much credit are you using on each account versus how much is available?
• Are you making your payments on these accounts consistently on time?

The more accounts you have reporting on-time payments, the stronger your credit score will be.

Business information

Consistency is of utmost importance as well. Be absolutely certain that your business name and address are listed exactly the same everywhere. If you spell out “street” one time and use “ST” another time, it could be a problem; if you use an ampersand in your business name on one document and the word “and” on another, that could also be an issue. Little details can cause big problems with lenders, and can result in you being denied for a small business loan.

Why? First, it looks unprofessional. But even more than that, it's a red flag for fraud. Lenders are not going to take the time to research. If something looks fishy, they will just deny the loan.

All of your business information has to be the same everywhere. This can get especially tricky if you are already an established business trying to build a fundable foundation. When you start changing things up, like adding a business phone number or incorporating, you may find it’s easy for things to get missed.

This is a problem because many loan applications are denied each year due to fraud concerns just because things do not match up. Maybe some of your credit accounts have a slightly different business name variation or an old phone number that are different from what is on your loan application. To reduce your chance of being denied for a small business loan, pay attention to these details.

More articles from AllBusiness.com:

• Banks Are Failing Entrepreneurs, but Alternative Lenders for Small Businesses Can Help
• What Employee Tax Records to Keep and for How Long
• 10 Key Steps to Getting a Small Business Loan
• Questions Prospective Lenders Will Ask Before Loaning Business Money
• How Crowdfunding Helps Close the Funding Gap for Women Entrepreneurs

3. There is an issue with financial statements

Obviously, both your personal and need to be in order if someone is going to lend you money. But there is more to this than just tax returns:

Business financials

If you can, have an accounting professional prepare regular financial statements for your business. This is much better than simply printing reports from your accounting system. Having an accountant’s name on your financial statements lends to their reliability. Monthly or quarterly are great, but at least have professional statements prepared annually so they are ready whenever you need to apply for a loan.

Personal financials

Typically, lenders will ask for personal tax returns from the past three years. It is best if a tax professional prepares them, but obviously if the years are already passed and that isn’t the case, you use what you have. This is the bare minimum you will need. Lenders may ask for a number of other documents, such as check stubs and bank statements, among other things.

4. Other bureaus have information on you or your business that looks bad to lenders

An example of another bureau having negative information on you is ChexSystems, a consumer reporting agency which provides information on closed checking and savings accounts. ChexSystems also keeps up with bad check activity that will make a difference when it comes to your bank score. Too many bad checks can keep you from being able to open a bank account, and that will definitely look bad to lenders.

Pretty much everything else is also fair game. Have you ever been convicted of a crime? Do you have a bankruptcy or short sell on your record? Are there any UCC filings or liens? All of this can and will play into the fundability of your business and may result in your being denied for a small business loan.

5. You have bad personal credit

Your personal credit score from Experian, Equifax, and TransUnion can all affect the fundability of your business as well. The No. 1 way to get a strong personal credit score or improve a weak one is to make payments consistently on time. Be certain you monitor your personal credit regularly to ensure mistakes are corrected and that there are no fraudulent accounts being reported.

6. You botched the application process

Yep, even the application process can be an issue. First, consider the timing. Is your business fundable right now? If not, this may not be the best time to apply for a loan with a traditional lender. Try another funding option, like an alternative lender, while you work on fundability.

Next, make sure that your business name, business address, and ownership status are all verifiable—lenders will check.

Lastly, choose the right lending product for your business and your needs. Is a traditional loan or a line of credit better for you? Would a working capital loan or expansion loan work best? Choosing the right product to apply makes a difference.

Stop being denied for a small business loan and get the funding you need

Did you realize all the things that can affect your ability to get approved for a small business loan? If you aren’t in a position to get a business loan right now, there are other options such as alternative lenders. An alternative lender can help you out in the short term, and if you work on building business credit in the process, you will only help your cause.

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