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My Loan Was Rejected. What’s Next?
January 5, 2024
Confused young female wearing glasses open mortgage loan rejection letter

Let’s look at some common reasons banks don’t approve loan applications.

  • Poor Credit History - When applying for a loan, lenders look closely at the borrower’s creditworthiness. If there’s a history of late payments, defaults, or bankruptcy; it likely will lessen the chance of getting a loan.
  • Insufficient Collateral - Many lenders require individuals to put up collateral to secure the loan. The loan may be denied if you lack the assets to serve as collateral.
  • Inadequate Cash Flow - Lenders look for consistent cash flow to ensure you can repay the loan.
  • Limited Credit History - Lenders often prefer individuals with a proven track record of stability, making it even more challenging to get a loan.
  • High Debt-to-Income Ratio - People with a high level of existing debt in relation to income are viewed as riskier investments by lenders.

Personal Guarantees

Sometimes, lenders require borrowers to personally guarantee the loan. The loan may be rejected if the borrower won’t—or can’t guarantee it.

Other reasons a lender may reject your loan application include a lack of clear purpose for the loan.

Essentially, this all boils down to these key questions: Can you and will you repay the loan?

How to Get a Loan

Being rejected for a loan can be frustrating, but it’s not the end of the road. There are several things you can do to improve your chances of getting approved next time:

Analyze the reason for the rejection to understand why your loan application was denied. The lender should provide an explanation in writing, or you can contact them directly and ask for clarification. Once you know the reason, you can address it and improve your application for the next time.

No matter the reason, you should also review your financial statements, which must be accurate and up to date. You can check the SBA Lender Match tool to find a list of small business lenders.

The Importance of a Strong Credit Score

One of the most important factors lenders look at when deciding if you meet their loan requirements is your personal credit score. The typical range of personal credit scores is between 300 to 850.

The National Banker’s Association says, “Improving [your] credit scores leads to better access to loans and lower interest rates.” The Federal Reserve found that taking financial education programs “positively impacted participants’ credit scores.”

Therefore, what credit score should you aim for? Bankrate says that while each lender has its own minimum credit score requirements, some general guidelines exist for the scores needed to qualify for a loan.

The following is based on personal credit scores:

  • Banks and credit unions: minimum 680; scores of 740 or higher obtain better loan terms.
  • Small Business Association (SBA) lenders: minimum 620 to 680.
  • Online lenders typically accept lower credit scores but charge higher interest rates.
  • Term loans: minimum 670; around 500 for online lenders.
  • Business line of credit: minimum 670; 580 for online lenders.
  • Commercial real estate: minimum 680.
  • Equipment loan: 550, since the equipment secures the loan.

Build a Relationship with a Banker

One of the smartest things you can do to increase your chances of getting a loan is to establish a relationship with a banker.

When you meet a banker, ask specific questions.

  • What types of loans do you offer?
  • What are the interest rates and fees?
  • What is the loan approval process?
  • How often will I meet with you? Compare that with the level of service you expect (regular check-ins, financial advice, etc.)
  • What experience do you have working with small businesses?
  • What resources do you offer small businesses?

Interview at least three bankers.

  • This gives you a chance to compare their qualifications and personalities.
  • Ask questions to get a feel for their expertise and ability to communicate.

You do not have to go through this process alone. Seeking guidance from a SCORE mentor can be invaluable. They can help you understand why your small business loan got rejected and offer expert advice on strengthening your business.

Most importantly, do not give up. Use your rejection as an opportunity to learn how to increase your chances for approval the next time you apply for a small business loan.

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National Bankers Association Foundation

The National Bankers Association Foundation’s mission is to eliminate the racial wealth gap by ensuring underserved communities have fair access to transformative financial education, services, and resources. To accomplish this, we support the work of Minority Depository Institutions (MDIs) through our four strategic pillars, which include: Financial Education, Entrepreneurship and Small Business, Research and Impact, and Collaboration and Capacity Building.

National Bankers Association Foundation
Smart Credit Strategies for Small Business Owners
When it comes to growing your business, strong credit scores—both business and personal—can give you a significant advantage. Download this ebook for the best credit strategies for a successful small business.
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Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.

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