Top 6 Reasons Why SME Loan Gets Rejected

Top 6 Reasons Why SME Loan Gets Rejected

Top 6 Reasons Why SME Loan Gets Rejected

Small business owners are counting on getting that SME business loan, but lending institutions say no. In fact, more than 80% of small business owners’ application for financing gets rejected. What should they do next? The answer is to find out the reason for the denial. Some lending institutions will notify you the reason(s) why your SME Loan application was rejected while others won’t share details.


You might feel incredibly frustrated and discouraged if this has happened to you recently. Don’t feel down! This happens to even the most successful business owners, and quite often more than once. Understanding the reasons behind the rejection is the first step to a successful future financing application.


Here are the top 6 reasons why SME Loan applications are rejected by lending institutions.


1. Bad Credit Score or Lack of Credit History


Credit Score measures a person’s or business’s creditworthiness. Lending institutions look at BOTH personal and business credit scores before approving loan applications. Yes, you read it right! Even if your company has been in business for a while, your personal credit score does factor into a SME Loan application. Default payment, late payment, court judgment and even a lack of financial history may result in a poor credit score. Monitor your personal and business credit score before submitting your SME Loan application.


If a low credit score is the reason you are turned down, review your score and take steps to repair. With CapitalBay, the magic score we look at is not of yours, but your customers’. That’s right, you can get financing based on the creditworthiness of your customers.


2. Limited Collateral


Most traditional lending institutions consider SMEs as a high-risk group. More often than not, they require some form of collateral. For example, property, vehicle, inventory, saving accounts, accounts receivables and so on. They will turn down your SME Loan application if you do not have enough of the right type of collateral. You may also offer your personal assets as collateral if your business has insufficient assets.


If this is your situation, look for alternative sources of financing such as invoice financing or contract financing. With CapitalBay, you don’t need collateral to be considered for credit.


3. Poor Evidence of Strong Cash Flow


Lending institutions will also dive into your business cash flow cycle. This is to understand whether you have enough cash flow to cover your business expenses and to repay the loan. Lenders will raise red flags if your business is spending more money than what it is receiving. Maintaining a healthy cash flow is a huge challenge for many small businesses, even when they are profitable. This is because they would have to pay third party suppliers upfront before they get paid for their services. So, do make sure that you have a proper cash management system in place. For example, issue invoice promptly, diligent collection of payment, institution of late fees and so on.


If you struggle with cash flow issues, check out these 5 strategies to boost your business cash inflow.


4. High Debt Utilization Rate


Lending institutions will also review your gearing ratio: the level of a business’s debt in relation to its equity capital. The higher the gearing ratio, the higher the risk and the more hesitant lenders will be in providing you with any loans. Make sure that you keep track of your total credit limits and maintain a reasonable debt usage.


If you can show a good history of using credit responsibly, that can count favourably for you.


5. You’re not asking for enough money


Sometimes, the more money you ask for, the more likely you are able to get a loan. Confusing right? For traditional lending institutions, the cost of servicing large volumes of small loans is not worth the work. They want to underwrite larger loans as it’s more profitable for them.


Review your financial projections and business plan to ensure that you’re not underestimating the amount of capital you need. If you don’t need more than you already asked for, consider options beyond loans such as invoice-based financing or contract-based financing.


6. Incomplete Application/Paperwork


Another reason why lenders deny SME loan applications is due to incomplete application. You might find this surprising but sadly, it’s quite common. Many often get lost in the complicated loan application form and the utterly long list of necessary supporting documents. From business plan, tax returns, bank statements to financial statements, legal documents and so on. Always double and triple check your SME Loan application before submitting.


If you are interested in business financing but you don’t have 30+ hours to kill on paperwork, check out some of the modern Fintech options out there. With CapitalBay, you can easily apply for credit via our online platform, with minimal paperwork required.




Getting rejected for financing is one of the worst feelings ever, especially at times when you need it the most. It is nothing personal and you can always try again. After you get past the initial frustration, the good learning experience will prepare you for future success the next round.


At CapitalBay, we are all about providing Business Financing the Smarter Way:

  • Easier
  • Faster
  • Flexible
  • Cost-Effective
  • Collateral-Free


Check out for more info here and get a quote now.