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3 reasons lenders turn down a loan application

One of the biggest challenges faced by small business is accessing the capital they need to thrive and grow. Fewer than 20 percent of small business owners who visit a bank are able to secure a loan there, leaving most looking for other options to get important funds. About half of the U.S workforce works in a small business, reflecting how important it is for our economy to have these small businesses succeed.

Regardless of who the lender is, here are 3 top reasons a loan application will be turned down by a lender:

  1. One main topic talked about when the loan application is being reviewed concerns open Bankruptcies. It’s important to get all outstanding debt, liens and bankruptcies taken care of before applying for alternative funding. Otherwise, they will deny the funds right from the start. Even if you are able to work on your liens, you still need to be truthful about them in the application process.
  2. Another reason a loan will be denied is because your company has low or inadequate cash flow. Cash generated by your business is a lender’s go-to means of attaining the repayment on a timely manner. If your small business has low cash flow, lenders will have to look to other sources of security for their loan. Cash flow represents the “health” of every small business, and is a crucial factor in the loan approval process. If your business can’t show it has a consistent monthly cash flow, then it will most likely be denied funding due to lack of showing any sustainable level of commerce.
  3. If you are a startup, you may have trouble getting approved. Businesses that have been in operation for less than a year have an extremely difficult time acquiring a loan. Lenders will often only lend to businesses that have a solid track record of business and success. Startups will have a difficult time proving their value to a lender for an approval.

It’s important for small business owners to understand what a lender is going to consider before they give you a loan. If you or your business could be perceived as risky by a lender, it’s to your advantage if you fix or diminish the risks you know a lender is likely to identify. There’s no better time than now to get on the right track before applying for a loan.