7 Reasons Your Bank Denied Your Restaurant Loan Application

Business Expansion

Jacques Famy Jr
Review By Todd Millman

As a restaurant owner, securing funding is essential to the success and growth of your business. However, it can be frustrating when getting your business loan application denied. There are several reasons why this may occur, and understanding these reasons can help you improve your chances of approval in the future.

Top 7 Reasons your Bank may have Denied your Restaurant Loan Application

By identifying these reasons, you can take steps to address any issues and increase your chances of securing funding for your business. So, let's dive in and explore why your small business loan application may have been rejected.

1. Credit Reasons: Why You Might Be Denied

As the old saying goes, personal credit is king. In many cases, business financing products review both the personal credit history of the business owner and the business credit score. It’s a process wherein lenders look for evidence of a responsible borrower and evaluate business history. In this way, they gauge the integrity of the borrower. The credit utilization rate is a key factor considered, with businesses encouraged to maintain low credit utilization. The better the rate and terms of the business funding product you are applying for, the higher the thresholds for credit scores are likely to be, often requiring a FICO score of at least 680.

Remember that a denial due to credit reasons should not put you down. It simply means that you may be seen as a default risk for the specific type of business loan you applied for due to your high credit utilization or low FICO score. Businesses facing high utilization rates can improve their chances by paying down outstanding balances before reapplying, showcasing, in effect, a model of borrower's responsibility.

Consider AdvancePoint Capital’s business funding marketplace, an excellent platform for business owners grappling with credit challenges. For understanding the nitty-gritty of business lenders' perspective when making underwriting decisions, delve into our guide detailing how lenders evaluate business credit history, personal credit scores, and credit utilization.

If you're curious about business credit aspects like utilizing Experian or other such business credit bureaus, " How Does Business Credit Work: A Simple Guide to Establishing and Maintaining Business Credit" is a recommended read.

2. Impact of Time in Business on Loan Approval

The time in business generating revenue will dictate what business funding products can be offered. When it comes to entrepreneurship, startups with less than three years in operation may face hurdles as many traditional business loan products may not be an option due to the lack of robust business history. This might explain their common rejection for financing. Despite such deterring circumstances, there are viable alternatives available to startups, offered by alternative lenders, that could help overcome these challenges. Even companies that are less than a year old can capitalize on this opportunity.

3. Perceived Risks in The Restaurant Industry

Some banks find the restaurant industry too risky to lend to. Much like the notorious gambling sector and the contentious CBD businesses, which face a higher likelihood of funding difficulties due to frequently changing regulations, the restaurant industry can also be seen as a gamble due to high failure rates. So, even if you meet the normal requirements for a traditional long-term business loan or business line of credit, you may face an inability to secure funding, somewhat akin to being blacklisted just like those in the gambling or house flipping businesses.

However, the silver lining here is that there are many products and business lenders who are willing to transcend this perceived risk, just as a skilled poker player trusts their own hand amidst the uncertainty of the cards yet unseen. These lenders will compensate the higher risk of the restaurant by offering elevated rates and modified terms.

4. The Role of Collateral in Loan Denial

Some small business loans with attractive rates and terms may require collateral to approve business loan applications. Traditional lenders, including renowned bankers, require collateral, and you will not get approved if you don’t have it. This collateral can include items specified in leases and warranties. However, it's important to note that many business funding alternatives such as short term business loans, lines of credit and business cash advance do not require certain types of collateral.

5. Debt Utilization Is Too High (Or Not High Enough): A Key Factor for Denial

Lenders and funders look to see what kind of debt you currently have to see if you are overextended and can or cannot afford more debt. This scrutiny provides them an insight into your debt utilization rate, a factor often underscored in the editorial content by financial experts. As mentioned by Forbes, a significant portion of businesses struggle with accurate and timely financial reporting, which can impact their debt history.

On the other side of the coin, you may be viewed as high risk if your business lacks any debt history. Therefore, striking a perfect balance is the hurdle you are striving for. Debt ratios, have more tolerance for debt utilization than others. Generally speaking, lenders prefer an applicant's debt utilization rate to be under 30%. Not all business funding products regard debt utilization in the same light.

6. Cash Flow Considerations

Cash flow is a very important factor for all business funding products. Cash flow, specifically reflected in business bank statements and cash flow projections, is an essential consideration by lenders when assessing business loan applications. Your business bank statements can play a pivotal role in showing your ability to repay a business loan, manage normal expenses, while still ensuring a healthy stream of cash flow.

In the event your cash flow dips too low, communicating with lenders through phone and email becomes crucial, and exploring business financing. Remember, lenders are well aware that many small businesses encounter challenges due to poor cash flow management. Therefore, staying on top of cash flow details, regularly monitoring expenses and revenue, can make a substantial difference in your funding success.

7. Selecting Incorrect Loan Option or Business Loan Originators: Reasons for Denial

This reason for denial is more common than you may think. Banks and traditional business lenders are limited to business loans and/or lines of credit. Some banks offer SBA loans, and others do not. Also, banks and traditional business lenders have fewer business finance product options overall than a business finance marketplaces or business loan brokers.

Picking the right business loan originator to help you find the right loan for your restaurant

  • Every business originator differs in terms of what products are offered, so it’s vital that you ask what programs and business finance products they offer.
  • You need to find out if they can match your qualifications and needs, compared to what's out there in the business finance marketplace.
  • Alternative lenders have products that banks do not.
  • Choosing a business loan originator who understands your qualifications and loan application is important, so time, effort, and in some cases, money is not wasted.
  • There are many different business funding products that will allow for credit issues, no collateral like unsecured loans, low daily cash flow, and many other reasons that could cause a denial of one business loan but not for another. Not all business funding products are created equal; neither are business loan originators. Find the best originator to handle you business loan application.
reasons for denial for a restaurant loan

Exploring Different Types of Business Loan Originators Offering Business Funding

  • Traditional banks (Bank of America, Wells Fargo, Chase, etc. )
  • Credit Unions
  • SBA Approved Lenders
  • Online Business Lenders (Fintech) or Online Business Originating Marketplace
  • Business Loan Brokerage Firms (Independent Sales Organizations aka iso's)
  • Long-Term Business Lenders
  • Equipment Financing Companies
  • Invoice Factoring Companies
  • Private Business Lenders
  • The Federal Reserve Bank and its range of Small Business Financing Options
  • Hard Money Business Lenders
  • Commercial Real Estate Lenders offering funding solutions for small business banking

These organizations play a critical role in creating financing relationships, act as suppliers of capital, and sometimes as crucial creditors. In addition, they are beneficial allies for navigating the alleys of small business loan denial and ensuring business loan rejection doesn't come in the way of your entrepreneurial aspirations.

The 8 Best Small Business Financing Alternatives for Restaurants

Here is a list of the best small business financing alternatives for restaurants.

Long-Term Business Loans 

Long-term small business loans are loans for over two years.

  • Businesses are offered a fixed amount upfront and charged principal & interest.
  • Typically, long-term business lending is for business expansion and growth or to finance large long-term projects.
  • This business funding option is used for long-term projects and needs.

Business Line of Credit 

Business lines of credit is a revolving credit facility extended by a financial institution to a business, allowing businesses to draw funds at will up to a set limit.

  • It provides access to capital on the fly for business financing needs.
  • This product helps manage cash flow, purchase items for the business, or cover business expenses.

Small Business Credit Cards 

  • Credit cards are a supplemental financial tool for paying expenses and purchases for the business.
  • This revolving credit line issues a card that allows you to access funds when need up to a credit limit.

Short-Term Small Business Loans 

Short-term business loans are business loans whose term ranges from 3 to 36 months depending on your qualifications and the financial institution you choose.

  • Term loans have fixed loan amounts, terms, and payments and are not flexible like a line of credit.
  • The cost is calculated by interest rate or a factor rate over a shorter time than traditional loans.
  • Short-term business loans are an alternative to traditional business funding.
  • Short-term small business loans charge more for costs and are shorter-term.
  • The payments are more frequent to compensate for the greater risks business lenders take in offering this product.
  • Short-term business loans require less documentation and creditworthiness is more forgiving than other options.

Business Cash Advance 

Business Cash Advances (BCA) are also called Purchase of Future Sales Agreements that advance future sales at a discount to a business.

  • This is not a loan, but an advance of future revenue of the business.
  • You pay back a greater amount than the advance called a "specified amount". This gap between the advance and payback amounts is called the “factor rate or cost,” which is a fixed cost. This is not principal and interest costs.
  • The repayment of the advance is calculated by a set percentage of future revenue.
  • A "convenience" fixed ACH payment is collected daily or weekly, from a business bank account calculated by the specified percentage of future sales agreement.
  • Once a month, reconciliation can occur. If the ACH payments exceed the set future percentage of sales, this can trigger a refund for overpayment, to balance the set future payment percentage of sales to the current revenue. This process of repayment based on future sales continues until the payback amount is paid back in full, no matter how long it takes.
  • The payback process is directly attached to future sales so no date certain is available for full payback.

Merchant Cash Advance 

A Merchant Cash Advance (MCA), is a Receivables Based Sales Agreement, that operates similarly to BCA. The repayment process is different though, which is connected to future credit card processing rather than total monthly bank deposits with a fixed ACH payment.

  • MCAs take a set percentage of future credit card processing as repayment at the time of the batch of credit cards.
  • Restaurants appreciate this repayment process as it's directly attached to future sales which helps balance profitability compared to loans with fixed payments no matter the revenue fluctuation.
  • This small business funding is used primarily for working capital needs.

Equipment Financing 

Businesses that use equipment to operate their business often turn to equipment financing for purchases that uses equipment as collateral. Business owners must have good to excellent credit, but limited paperwork is necessary to get approved.

Small Business Administration (SBA) Loans 

The Small Business Administration (SBA) is a federal agency that supports small business through small business loans.

  • SBA sets the programs and guidelines for approved SBA lenders to issue business loans.
  • These small business loans have great rates and terms, but there is a thorough and lengthy application process with strict credit requirements.

The Bottom Line: Useful Tips for Applying for a Restaurant Business Loan

When looking for restaurant financing, it starts with choosing the right financing institution that can match your need and qualifications with the best business financing option that is available in the marketplace.

  • Shop for business funding and compare products, rates, and terms that various business funding originators offer.
  • Remember to check the experience, knowledge, and reputation of the lender, with a keen eye on insights provided by unbiased, unpaid editorial teams; always ask for terms and disclosures in writing.
  • Consider the rate, cost and terms against the reason you need money before making decisions on business funding.
  • Does the risk outweigh the reward? Performing a cost vs. value analysis, may prove beneficial in your decision-making process.

How to Secure a Business Loan for Your Restaurant with Advancepoint Capital’s Business Funding Marketplace

AdvancePoint Capital offers a marketplace of products that best suits your qualifications and specific need. Our specialty lies in the placement of suitable loans for potential entrepreneurs, particularly in sectors like restaurants, which may face higher risk due to seasonality reflected in service-based businesses. Our incorporation of the knowledge of common pitfalls of business loan rejection helps to circumvent this setback experienced by many seeking funds . Our form is simple to fill out, enabling you to swiftly connect with our business finance specialists who understand the ins and outs of lending decisions in the realm of entrepreneurship.

Experience a fast, convenient, and straightforward way to get the money you need for your business, even reducing the likelihood of small business loan denial. Secure your quote today by filling out our simple form.

Jacques Famy Jr

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