5 reasons why your business loan was denied

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Getting rejected – be it for a programme, a job, or even by a romantic partner – can be discouraging. A business loan is no different.

Yet, if you find yourself in this position, we will be the first to tell you that you are not alone. It is incredibly common to be rejected for traditional bank business loans. Banks reject approximately 80 per cent of small-medium enterprises in Singapore.

This could be due to these five reasons.

Five reasons why your bank loan was denied

1. Damaged business credit score

A business credit score is an indicator of whether the company is a good candidate to loan money to.

There are many factors that can play a role in a bad credit score: legal filings, repayment histories, and many more.

Essentially, your business credit score tells lenders whether you are likely to pay back debts on time. So, having a good business credit score is key, and it can make or break your business loan application.

2. Damaged personal credit score

This will probably come as a surprise to many, but banks do consider your credit score too. Small sized businesses are often closely tied with their owners. Banks may take a look at your personal credit score to understand how your business will handle financial obligations.

According to a Goldman Sachs survey, it was discovered that 70 per cent of small business owners said their personal credit score played a key role in their business funding.

3. Insufficient track record

A new business can be at a disadvantage for two reasons.

First, the businesses may not have had sufficient time to build a good credit history, leading back to the first point. The second is that the business is simply not eligible for the loan.

Lending money is a risk, and so banks want to be as safeguarded as possible when doing so. Most banks have a stipulated requirement of how long a business needs to run before they are eligible for loans.

ALSO READ: 4 key factors to keep in mind to secure your SME loan in Singapore

4. Lack of concrete business plan

When considering a business loan, a lender would be interested in how you plan to make ends meet moving forward. A good business plan is a document that shows the lender your vision. It describes how you plan to grow your business, a projection of costs and revenue, strategies you plan to adopt and so on.

Not having a strong business plan reduces a lender’s confidence and may play a role in a rejection.

5. Wrong lender

With so many banks out there, there are bound to be a lot of options.

Almost every bank offers some form of a business loan and there could be several key differences between any two lenders. Perhaps, you may not be able meet the eligibility requirements of one, but can easily do so for another.

So, if you are rejected from one bank, fret not, there could be another out there that is the right fit for you.

Alternative options

The five reasons mentioned above are some of the most common reasons why a business loan may be denied.

To get a better idea of why your specific business was rejected, reach out to your lender and be sure to inquire about the details of the rejection. More often than not, they would be happy to give you their reasons, so that you can better understand your business’ shortcomings going into the future.

If you have not managed to secure a business loan, do not lose hope. There are still many alternative avenues worth exploring.

Business credit cards

A traditional business loan may be out of the picture for now, but you might be able to secure extra funds through a business credit card. Credit cards offer many savings and rewards. Additionally, a well managed business credit card can help you build a good credit score, and you secure a traditional bank loan in the future.

One credit card you can look at is the American Express Singapore Airlines Business Card, which offers massive savings on businesses related travel and expenditure. This card is particularly good for SMEs that conduct business overseas. 

Apart from the card mentioned above, there are many more cards out there so do explore the various cards available for your business. You can find a full list here.

Other loans

There are many other types of loans out there that do not come from traditional banks.

One particular type of loan worth checking out is the equity crowdfunding loans. These gives businesses the opportunity to raise thousands or even millions of dollars worth of funds and also flexible loan repayment schedules.

Government backed loans are also worth considering, especially with Singapore recently supplying a lot of funding for startups and SMEs.

The table below lists out some of our recommended loans, along with their benefits and shortcomings.

Loan Pros Cons
Funding societies (FS bolt & Invoicing) Best for large loans, inexpensive, Popular among SMEs Can only borrow for up to 12 months
Aspire SME loan Quick application, flexible Not the best for large loans
FundedHere Crowdfunding Platform Good for early stage startups Invite basis, not the best for immediate financing

Check out a full review of some of the best loans for SMEs here.

Reapplying

One option to always keep open is potentially reapplying for a traditional bank loan. This does not necessarily have to be to the same bank if you find that another one is better suited to your needs.

Once you speak to your lender and consult the specific reasons why your application did not go through, you can take steps to improve and hopefully, be successful next time around.

Understanding and improving both personal as well as business credit scores could be helpful in this endeavor.

There are also many steps you can take to increase your odds of securing a bank loan. As the saying goes, if at first you don’t succeed, try try again.

Conclusion

All in all, the reason why your small business loan application could have been rejected boils down to bad credit scores, insufficient time in business, lack of business plan, or something as unlucky as approaching the incorrect bank for you.

Nevertheless, there are many avenues out there for those who find themselves in this position.

Crowdfunding, approaching venture capitalists, taking on government backed loans, and signing up for reward based credit cards are some of the ways you can bounce back and secure the funding that you need.

At the end of the day, the only way you can secure financing to get your business off the ground is to never give up.

This article was first published in ValueChampion.