What Could be the Reasons Your Pizza Shop's Loan Application Gets Denied?

When it comes to business financing for a pizzeria, it can be a huge letdown to put in time and effort gathering all of your documents, filling out the loan application, waiting eagerly, and then getting your business loan denied.

You wouldn’t be the first entrepreneur to get a business loan rejection. Statistics show that only about 50% of bank and SBA loan applications get approved. So, it can be challenging to receive approval on a pizza shop loan application.

If you educate yourself on the most common reasons for business loan rejections, you can proactively take steps to increase your approval odds and avoid having your business loan denied when you reapply for funding.

Reasons You Might Have a Business Loan Denied

You can get rejected for business financing for several reasons. If you filled out a pizza shop loan application but had your business loan denied, the best thing to do is find out why you were rejected.

Here are the top reasons pizza owners had a business loan denied:

Bad Credit Score

One of the top reasons for business loan rejections is a poor credit score. It takes time to build a good business credit history. Maybe you’ve only been late on a few payments or struggled to manage your books. Whatever the reason, if your business credit score doesn’t meet the minimum lender criteria, most won’t want to assume the risk and you may have your business loan denied.

Before you apply, it’s a good idea to learn your credit score and the minimum accepted score of the lenders you are considering.

Traditional banks and the Small Business Administration (SBA) tend to have higher credit score requirements, while online or alternative loan providers typically have lower credit score requirements.

To improve your credit score so you don’t get a business loan denied, ensure you don’t fall behind on any bills. You may also consider getting a business credit card or small business line of credit, which can help improve your score if you make payments on time.

Insufficient Time in Business

Another factor when it comes to having a business loan denied is how long you’ve been in business. Many lenders use this as one of their top criteria when deciding whether to approve or reject a pizza shop loan application.

Some types of financing aren’t available for entrepreneurs who haven’t been in business for long. Most lenders prefer to see anywhere from two to five years of business history.

Alternative lenders generally have more flexible standards and will look at the whole picture instead of just one qualifying criterion. So, an alternative lender may be a more viable financing option for startups who want to avoid having a business loan denied.

Lack of Collateral

Traditional lenders like banks and credit unions often require collateral for financing. A 20% collateral requirement is not uncommon, but the amount of collateral required depends on several factors, including your creditworthiness, loan-to-value ratio, the depreciation rate of items used for collateral, and what the loan funds are used for.

Alternative lenders have solutions that don’t require collateral or require less collateral. If you have insufficient collateral, you may find that an alternative lender still offers you funding and that you won’t get your business loan denied.

Financial Statements Fail to Show You Can Repay the Loan

Lenders typically require financial statements as part of your business plan when applying for a loan. Your financial documents offer insight into the financial health of your pizzeria, and thus, your borrowing power. They also provide insight into your ability to pay back a business loan.

Some of the financial statements required may include:

• cash flow statement
• balance sheet
• income statement
• profit and loss statement
• annual revenue
• net income
• bank statements
• tax returns
• debt to income ratio

You may have your business loan denied if there is anything amiss in your financial documents. If you’re a new business, some lenders may examine your personal credit score and require a personal guarantee or more collateral before considering you for a loan.

Choosing the Wrong Type of Loan or Lender

Many entrepreneurs mistakenly think they’ll have no problem getting their small business loans from a bank. However, business loan approvals from banks have been way down since 2020. According to Statista, only 13.2% of big bank loan applicants and 19.3% of small bank loan applicants are approved for a small business loan. Plus, the application process is exhaustive and takes a lot of time.

The alternative lender industry approves a higher percentage of small business loans. It typically offers faster funding for financial products like commercial real estate loans, term loans, lines of credit, and revenue-based financing.

Ways to Decrease Your Chance of Getting a Business Loan Rejection

Some factors that play a role in small business loan rejections are outside your control—for example, if you are a startup and haven’t been in business long enough. But some things you can influence. Here are a few actions you can take to increase your chances of approval.

Shore Up Your Business Plan

Lenders expect a business plan that shows a lot of thought and time has been put into it. Your business plan has to convince the lender that your business is a good investment for them.

They’ll look for red flags in your plan. Make it harder for them to reject your application by presenting the best business plan possible:

• Demonstrate knowledge of your industry.
• Include all required documentation.
• Be thorough in your financial projections (and find ways to improve your metrics, if needed).
• Provide a convincing marketing plan that will almost guarantee your business’s success.

Improve Your Credit Score

Obtain copies of your credit reports to discover areas that need improvement.

• If your credit utilization score is too high pay down your debt to lower it.
• If you lack credit, open up more credit lines, staying careful to keep your credit utilization ratio below 30%.
• If you are slow at paying your bills and have late payments on your credit record, work hard to make timely payments and consider scheduling automated payments to ensure they’re on time.

Small changes can have a big impact over time. You may not see the impact of your changes right away but keep working on it. If you’ve been rejected for a large loan, you may apply for a smaller loan with higher interest rates while you improve your creditworthiness.

Review Your Business Metrics

Was your business loan denied because you were told you had insufficient cash flow or too much debt load? Here’s what you can do:

• Look for better ways to manage your business expenses. For example, decrease some of your costs by renegotiating terms with suppliers or cutting unnecessary costs.
• Find ways to increase profits. For example, you might run a promotion that brings in more customers and increases loyalty to your business. This, in turn, can increase your revenues over the long term.
• Lower your debt-to-income ratio. This is a vital metric most lenders evaluate. You can lower it by reducing any outstanding debt, such as high-interest credit cards.
• Reduce your debt load. Reducing how much you owe can also lower your debt-to-income ratio and improve your cash flow. Consider consolidating some of your debt into a lower-cost loan.

Increase Collateral Whenever Possible

Some lenders want to see that you are just as invested in your business as they are. Many small business owners go the extra mile in providing more collateral to secure a loan. Some use a personal home or vehicle, money from an investment account, or personal savings to provide the collateral needed to get their loan approved.

Develop A Relationship With a Loan Provider

Part of every great pizzeria’s success is getting funding at a moment’s notice when opportunities arrive to optimize or expand their business. That comes from having a good rapport with a loan specialist.

The best loan brokers will learn more about your business needs and goals. From there, they can recommend the best types of business financing, advise you on ways to improve your credit, and connect you with other financial leaders.

In the end, partnering with a loan specialist can decrease your odds of having a business loan denied and increase the likelihood you’ll be approved.

FAQs

What is the biggest reason an entrepreneur might get a business loan denied?

A bad credit score is probably the biggest factor in receiving a loan denial. It’s difficult for borrowers with excellent credit scores to get approved for a business loan. With bad credit, the likelihood of a business loan rejection increases.

What type of credit score minimum is needed for a small business loan?

It’s recommended to have a minimum credit score of 680 to 700. Alternative financing might be a better option if your credit score is lower. This is because some alternative loan providers have loan solutions for borrowers with credit scores as low as 575.

What percent of Small Business Administration applicants get a business loan denied?

Overall, SBA loan rejections hover at around 50%. But this figure varies by loan type. SBA microloans have higher approval rates while SBA 7 (a) loans have lower approval rates.

What’s the most I can borrow to open a pizza restaurant?

The SBA will back loans up to $5 million while some alternative lenders will match that or even exceed that. But the amount you receive will vary depending on your needs and the lender.

What is the average cost to start a pizza business?

According to Toast, the average investment to start your own pizza business can range from $95,000 to $2 million. A lot of it depends on your business model and location.

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