Why Business Loans Get Denied (And How to Fix It)

Business loan applications get denied for predictable reasons. 

Poor credit, insufficient revenue, not enough time in business, too much existing debt, or incomplete documentation. Sometimes it's one major issue. Sometimes it's several smaller ones adding up. 

The frustrating part is that lenders often don't tell you exactly why you were rejected, leaving you to guess what went wrong. 

Understanding the common reasons helps you diagnose the problem and fix it before applying again.

The Reality of Business Loan Denial Rates

Getting denied isn't unusual. You're not alone if it happened to you.

According to the Federal Reserve's 2024 Small Business Credit Survey, 21% of small businesses that applied for financing were denied entirely. Another 38% received less than they asked for. Only 41% got the full amount they requested.

The denial rate varies dramatically by lender type. Banks reject applicants at much higher rates than online lenders. Businesses seeking larger amounts face more scrutiny than those asking for smaller sums. Newer businesses get turned down more often than established ones.

A denial doesn't mean your business is failing or that you'll never get funded. It means that particular lender, at that particular time, didn't see a fit. Understanding why helps you find a lender that will.

The Most Common Reasons for Denial

These are the issues that sink most applications.

Poor Personal Credit Score

Your personal credit score is the first thing most lenders check. If it's below their threshold, you might be rejected before they even look at anything else.

Banks typically want scores of 680 or higher. Some require 700+. Online lenders are more flexible, with many working with scores in the 600s. A handful work with scores in the 500s, but options at that level are limited and expensive.

Credit score problems that commonly cause denials:

1. Recent late payments. Even one 30-day late payment can drop your score significantly.
2. High credit utilization. Using more than 30% of your available credit hurts your score.
3. Collections or charge-offs. These stay on your report for seven years.
4. Bankruptcy. Chapter 7 bankruptcy remains on your report for ten years, Chapter 13 for seven.
5. Too many recent inquiries. Multiple credit applications in a short period signal desperation.

How to fix it: Pull your credit report and identify specific issues. Pay down credit card balances to reduce utilization. Make all payments on time going forward. Dispute any errors you find. Credit repair takes time, but even a few months of positive behavior can help. For options while you rebuild, see our guide on bad credit business loans.

Insufficient Time in Business

Most lenders want to see track record. A business that's been operating for three years has proven it can survive. A business that launched six months ago is still an unknown.

Typical minimum requirements:

1. Banks: 2+ years
2. SBA loans: 2+ years (sometimes 1 year for certain programs)
3. Online lenders: 6 months to 1 year
4. Merchant cash advances: 3 to 6 months

If you don't meet the minimum, you'll likely be declined regardless of how strong other factors look.

How to fix it: Time is the only remedy. Keep operating, building revenue, and establishing history. In the meantime, explore options designed for newer businesses. MCAs, microloans, and business credit cards have lower time-in-business requirements. Some founders use personal loans for business purposes while waiting to meet business loan requirements.

Revenue Too Low or Inconsistent

Lenders need confidence you can make payments. Revenue demonstrates that ability.

Most lenders have minimum revenue thresholds:

1. Banks: Often $250,000+ annually
2. SBA loans: Varies, but typically want stable, documented revenue
3. Online lenders: Usually $50,000 to $150,000+ annually
4. MCAs: Based on monthly sales, typically $10,000+ per month

Beyond the total, consistency matters. Lenders prefer steady monthly deposits over wild swings. A business that makes $30,000 one month and $5,000 the next raises questions about payment reliability.

How to fix it: If revenue is the issue, focus on growing sales before reapplying. Even three to six months of stronger numbers can make a difference. When you do apply, choose a lender whose minimums align with your actual revenue. Applying to lenders that require $200,000 when you generate $80,000 wastes everyone's time.

Too Much Existing Debt

Lenders calculate your debt-to-income ratio and debt service coverage. If you're already stretched thin, they won't add more debt to the pile.

They're looking at:

1. Existing business loans and lines of credit
2. Business credit card balances
3. Personal debt that affects your ability to guarantee the loan
4. Lease obligations
5. Any other fixed payment commitments

If your existing payments consume too much of your cash flow, you'll be denied even if other factors look good.

How to fix it: Pay down existing debt before applying for new financing. Consolidating high-interest debt into a single lower-payment loan can help your ratios. If you can't pay down debt, wait until existing obligations mature and pay off. Each loan you eliminate improves your capacity for new borrowing.

Cash Flow Problems

Revenue is what comes in. Cash flow is what's left after expenses. Lenders care about both.

Even businesses with strong revenue can have cash flow problems. High expenses, thin margins, or timing mismatches between when you pay suppliers and when customers pay you can all create issues.

Lenders review your bank statements looking for:

1. Negative balances or overdrafts
2. Low average daily balances
3. Irregular deposit patterns
4. Large unexplained withdrawals

Multiple overdrafts in recent months is a major red flag. It suggests you're already struggling to manage money.

How to fix it: Clean up your bank account before applying. Maintain higher balances for a few months. Eliminate overdrafts entirely. If cash flow timing is the issue, consider invoice factoring to accelerate collections without taking on new debt.

Incomplete or Inaccurate Application

Sloppy applications get rejected. Missing documents, inconsistent numbers, or obvious errors make lenders wonder what else might be wrong.

Common application problems:

1. Missing bank statements or tax returns
2. Revenue numbers that don't match bank deposits
3. Incomplete information about business ownership
4. Outdated documents
5. Typos in critical fields like EIN or address

Lenders don't have time to chase missing information. If your application isn't complete, it goes to the bottom of the pile or gets declined outright.

How to fix it: Before submitting, verify you have every required document. Double-check that numbers match across documents. Have someone else review your application for errors. Treat the application like you'd treat a pitch to an important client. Presentation matters.

Risky Industry

Lenders categorize industries by risk level. Some industries see higher failure rates, more fraud, or more legal complications. Being in a "high risk" category can hurt your chances.

Industries that often face extra scrutiny:

1. Restaurants and bars
2. Construction and contracting
3. Retail (especially brick-and-mortar)
4. Entertainment and nightlife
5. Cannabis-related businesses
6. Firearms dealers
7. Adult entertainment
8. Gambling

How to fix it: You can't change your industry. But you can target lenders who understand your business. Industry-specific lenders exist for many high-risk categories. You can also offset industry risk by being stronger in other areas: better credit, more revenue, longer history, more collateral.

Collateral Issues

For secured loans, the collateral you're offering matters. If it's insufficient, hard to value, or hard to liquidate, lenders may decline.

Common collateral problems:

1. Assets don't cover the loan amount
2. Equipment is outdated or specialized
3. Real estate has existing liens
4. Inventory is perishable or trendy
5. Receivables are from unreliable customers

Lenders discount collateral value because they know selling seized assets rarely recovers full value. If your collateral doesn't provide adequate coverage after discounting, the loan won't be approved.

How to fix it: Get a realistic appraisal of your assets before offering them as collateral. Consider unsecured loan options if your collateral is weak. For equipment financing, the equipment itself serves as collateral, which can be easier than pledging existing assets.

Weak Business Plan or Unclear Use of Funds

Banks and SBA lenders often want to understand what you'll do with the money. A vague or unconvincing answer can tank your application.

"I need $100,000 for general business purposes" isn't compelling. "I need $100,000 to purchase inventory for our busy season, which historically generates 40% of our annual revenue" tells a story that makes sense.

Lenders want to see that the loan will be used productively and that you have a realistic plan for repayment.

How to fix it: Be specific about your intended use. Connect the loan to revenue generation or cost savings. If you're applying to a bank or SBA lender, prepare a basic business plan that shows you've thought through the opportunity.

Legal or Regulatory Issues

Outstanding legal judgments, tax liens, regulatory violations, or pending lawsuits can all cause denials. Lenders don't want to compete with the IRS or courts for repayment.

Things that raise red flags:

1. Federal or state tax liens
2. Unpaid judgments
3. Active lawsuits
4. Regulatory actions against your business
5. Past business bankruptcies

How to fix it: Resolve outstanding legal and tax issues before applying. Payment plans for tax debt can sometimes be arranged. Satisfying judgments, even old ones, removes obstacles. If you have pending issues that can't be quickly resolved, be upfront about them. Surprises during underwriting are worse than disclosed problems.

What Lenders Don't Tell You

Federal law requires lenders to provide an "adverse action notice" when they deny your application. This notice must explain why you were rejected.

In practice, these notices are often vague. You might get something like "insufficient credit history" or "unable to verify information" without specifics about what was insufficient or unverifiable.

Some ways to get more information:

1. Call and ask. Reach out to the lender and ask for clarification. Not everyone will help, but some will.
2. Check your credit report. If credit was cited as a reason, review your actual report to see what they saw.
3. Review your bank statements. If cash flow or revenue was mentioned, look at your statements through a lender's eyes.
4. Ask about reapplication. Some lenders will tell you what would need to change for them to approve you in the future.

Understanding the specific reason helps you fix it. Don't assume you know why you were denied. Verify.

How Long to Wait Before Reapplying

The answer depends on why you were denied.

Credit score issues: Meaningful improvement takes three to six months of positive behavior. Major issues like bankruptcy need more time.

Time in business: Wait until you meet the lender's minimum. If they want two years and you have eighteen months, wait six more months.

Revenue: Wait until you can show a stronger trend. Three to six months of improved revenue can change the picture.

Documentation problems: You can reapply quickly once you've gathered everything needed.

Too much debt: Wait until you've paid down existing obligations enough to change your ratios.

Reapplying too quickly to the same lender with the same profile wastes your time and creates unnecessary credit inquiries. Make sure something has actually changed before trying again.

Alternative Options After Denial

A denial from one lender doesn't mean all doors are closed.

Try a Different Lender Type

Banks and online lenders have very different criteria. If a bank rejected you, online lenders might approve you. They're more flexible on credit scores, time in business, and documentation.

The tradeoff is cost. Online lenders charge higher rates than banks. But access to capital at a higher rate beats no access at all.

Consider Different Products

If term loans aren't working, other products might:

1. Lines of credit: Sometimes easier to qualify for than term loans.
2. Merchant cash advances: Based on sales rather than credit.
3. Invoice factoring: Based on your customers' creditworthiness rather than yours.
4. Equipment financing: Secured by the equipment, reducing other qualification requirements.
5. Business credit cards: Lower limits, but easier to obtain.

Start Smaller

If you can't qualify for the full amount you wanted, consider taking a smaller loan. Successfully repaying it builds your relationship with that lender and strengthens your profile for future, larger requests.

A $25,000 loan you can get beats a $100,000 loan you can't.

Work with a Broker or Advisor

Loan brokers work with multiple lenders and can help match you with options that fit your profile. They know which lenders are more flexible on which factors.

SCORE mentors and Small Business Development Centers (SBDCs) offer free advice on strengthening loan applications. They've seen thousands of applications and know what works.

Address the Problem Directly

Sometimes the best response to denial is fixing the underlying issue before trying again.

If revenue is the problem, focus on growing the business. If credit is the problem, spend six months improving it. If cash flow is the problem, tighten operations.

Fixing root causes takes longer but creates lasting improvement. You'll get better terms eventually than you would by scrambling for high-cost alternatives now.

Preventing Denial Before You Apply

The best way to handle denial is avoiding it in the first place.

Know where you stand. Check your credit score, review your bank statements, and calculate your debt ratios before applying. Go in with realistic expectations.

Match lenders to your profile. Don't apply to banks if you don't meet bank criteria. Target lenders whose requirements you actually satisfy. Our guide on how much you can qualify for can help you calibrate.

Prepare thoroughly. Gather all documentation in advance. Check for consistency. Make sure your application is complete and accurate.

Apply strategically. Don't shotgun applications to every lender you can find. Each hard inquiry affects your credit. Research first, then apply to your best-fit options.

Consider pre-qualification. Many lenders offer pre-qualification with a soft credit check. This gives you a sense of approval odds without commitment.

Frequently Asked Questions

Will a loan denial hurt my credit score?

The denial itself doesn't affect your score. But the hard credit inquiry from applying does cause a small, temporary dip. Multiple applications in a short period can compound this effect. That's why it's better to apply strategically than to blast applications everywhere.

Can I appeal a loan denial?

Formal appeals aren't typically available, but you can ask for reconsideration. If you have additional information that wasn't in your original application, or if you can explain circumstances the lender might not have understood, it's worth reaching out. Some lenders will take a second look.

How many times can I apply for a business loan?

There's no legal limit, but practical limits exist. Each application creates a credit inquiry. Too many inquiries in a short period look desperate and hurt your score. Space out applications and fix underlying issues between attempts rather than repeatedly applying with the same profile.

Should I apply to multiple lenders at once?

Applying to two or three lenders simultaneously can make sense, especially if you've researched them and believe you meet their criteria. This creates competition and gives you options to compare. But indiscriminate mass applications hurt more than they help.

What if I was denied for a reason that seems wrong?

Mistakes happen. Lenders might have incorrect information, misread documents, or made errors in underwriting. Check your credit report for errors. Review the adverse action notice carefully. Call the lender to ask for specifics. If you find a mistake, point it out and ask for reconsideration.

How do I find out my exact credit score?

You're entitled to free credit reports from each major bureau (Equifax, Experian, TransUnion) annually at annualcreditreport.com. These reports don't include scores, but many credit cards and financial apps now provide free score access. You can also purchase scores directly from the bureaus or through FICO.