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Top 10 Reasons Why a Small Business Loan Gets Rejected

Whatever the reasons, “business loan rejected” is the last thing you’d want to hear from your lender. This goes double if you need the cash to finance your liquidity.

In 2019, a third-party lender conducted a research study on business loans and found that about 40% of Australian small businesses applied for them. 

At the time of the study, the rejection rate was about 23%. But it spiked to 37% soon after. The numbers indicate that more than a third of Australian companies weren’t able to secure stable finances or loans. 

But there’s more to this than meets the eye. 

The following sections explore some of the most common reasons “business loan rejected” might appear on your application. 

Use these as guidelines for streamlining your operations and finance to make sure your business loan application gets the nod of approval from your lender. 

The Ten Reasons

Reason #1 – Poor Credit History

High outstanding debt, failure to make timely payments, and high credit utilisation negatively affect your credit history. The same goes for making too many loan applications. 

Sole owners of small businesses need to pay attention to their personal credit history as well. Failure to make timely mortgage and other payments will alarm lenders and could get your application rejected. 

Keep in mind that the above usually doesn’t apply to well-established companies, even if they only have one owner. 

Reason #2 – Income Limitations

One of the first things that lenders assess is your ability to pay off the debt. They need to be certain you can meet minimum payments every single month. 

If you struggle with your cash flow and/or revenue, these could be the main reasons “business loan rejected” becomes your reality. 

The same could happen if you’ve just started your company. Most lenders require you to have been in business for more than 12 months. But if you need money in an early startup stage, there are alternatives to consider. 

Reason #3 – Insufficient Collateral

This applies to businesses that want to take out a secured loan. If there are no assets or investments that can act as collateral, your loan could get rejected. 

Unsecured loans do not require collaterals, so this might be a better option for small business owners. But if you really want a secured loan, make sure to know which asset would be suitable for collateral. 

Reason #4 – Asking for Too Little

It might be surprising, but a lender might reject you because the requested amount is under what they consider a minimum for small businesses. 

Commonly, this happens with banks since they prefer to approve higher loan amounts. The logic is simple – the higher the loan, the more interest the bank will earn. 

Also, banks maintain that it takes the same effort and time to service a $150,000 loan as a $1.5 million one. But then, if you don’t need that much, there are always alternatives to borrowing from traditional banks. 

Reason #5 – Wrong Application

When applying for a business loan, it’s possible that you didn’t approach the right lender or asked for a loan option that’s not for you. 

But you aren’t to blame here. With so many different options available, you may need some guidance to make the right choice. 

This is where a loan broker could be of help. 

The expert will assess your needs and finance to figure out what options are available for your business. They can inform you of the requirements, as well as the pros and cons of a given loan. 

Reason #6 – Weak Projections and Cash Flow

Projections refer to your business’s ability to grow and scale in the coming years. As for cash flow, it should be sufficient to repay the loan and finance your operational expenses. 

If you apply for a loan with a bank, know that they’ll likely check the cash flow for the last 24-36 months. But other lenders might not be so demanding and may only consider your cash flow in the previous quarter. 

Reason #7 – Volatile Industry

Traditional lenders may consider certain industries as volatile – gambling, blockchain and crypto, cannabis, for example. These businesses may pose a high risk to lenders even if they’re doing well at the time of the loan application. 


The industries could be subject to changes in government policies. 

Reason  #8 – Issues with Paperwork or Documentation

It’s not uncommon for business owners to submit incomplete paperwork and get refused due to that. To avoid making the same mistake, here are some requirements to keep in mind. 

  • Clear use of funds
  • Previous tax returns (in detail)
  • Updated financial reports 
  • Insurance information
  • Date of incorporation (if applicable)
  • Clear business structure

The list isn’t limited to the above, so you should check with your lender for a complete list of requirements. 

Reason #9 – High Debt Utilisation

The debt-to-income ratio shows the percentage of your income committed to servicing loans. Ideally, you’ll want to keep the number under 30. 

High debt utilisation may affect your business credit score and show lenders you aren’t ready for a new loan. But if you manage to keep the ratio low, lenders will understand that you’re good at managing debt and may be more open to approving your loan. 

Reason #10 – You Don’t Have a Business Bank Account

There are industries that might not require you to have a business bank account. But you should consider setting one up as soon as possible. 

It has become tough to take out a loan without a bank account these days. That’s because lenders now also utilise the account data to assess if you’re eligible for a loan. 

Getting the Loan You Need

Now that you know the reasons, “business loan rejected” should be a thing of the past for your company. 

The things to keep in mind are your current and past finance, cash flow, and the paperwork required to file a complete application. 

But even if you don’t manage to secure these, know that there are always alternatives. 

Are you ready to take the next step? Unsecured Finance Australia can help you with your business loan. Click here for more information.

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