Business loan

8 Reasons Green Business Loan Applications Get Rejected

Are you interested in starting a green business? This is a noble goal to consider! There are many great green business ideas that can be both profitable and help the planet.

This is one of the best times to start a green business because support is higher than ever. A growing number of consumers are passionate about supporting green businesses. Seventy-six percent of Americans will support companies that help fight climate change.

Unfortunately, starting your own business is not as easy as it seems. Starting a green business can be even more difficult, due to the costs of sourcing more expensive materials. This can require large amounts of capital, which many people don’t always have.

This is where a business loan can help you launch your eco-friendly business. This can not only help you start your own business, but also take care of the various expenses that come with it.

However, when applying for a business loan, you must be careful not to make a mistake, as this could lead to your application being rejected. And the worst part of all this is that there can also be several reasons for rejection.

Mistakes to avoid when getting a loan for your eco-friendly business

You don’t want to make common mistakes when looking for a loan for your green business. In this article, we’ll look at 8 of the most common reasons why a business loan application may be rejected.

1. Failure to meet eligibility criteria

Wouldn’t it be great if lenders gave loans to eco-friendly companies just because they want to help the environment? Unfortunately, that is not how things work. You need to show that your business will be both environmentally friendly and financially viable.

Not all lending institutions have the same business loan eligibility criteria. In fact, depending on the lender you approach, they can be very strict or very flexible. If you apply for a business loan from a lender with strict criteria, you may not meet it, which will ultimately lead to your application being rejected.

2. Low credit score or no credit history

This is one of the main reasons why your business loan application is rejected. Lenders usually consider your credit rating and your or your company’s history before granting a loan. And if they find that your score or your history is not optimal, they could reject your application.

3. High debt utilization ratio

Another important factor considered by lenders when verifying the business loan application is your debt utilization ratio. If you are found to have used up a large portion of the total amount of credit issued to you, lenders may choose to reject your application. Ideally, your debt utilization ratio should not exceed 30%.

You will want to be efficient in how you use your money as a green business, which will help you rack up less debt. You can save money in the long run when you use environmentally friendly business practices, such as using solar panels to save money on energy. However, you cannot justify these expenses right away when applying for a green loan, unless they are crucial to the effective running of your business.

4. Too many loan requests

Applying for numerous loan applications in quick succession can hurt your chances of getting a business loan approved because you basically seem desperate. Also, when you apply for a business loan, lenders usually do a thorough credit score check, which is likely to impact your score as well.

5. Not enough business income

It would be great if eco-friendly companies got a lot more money from green customers. Unfortunately, this does not always happen. Harvard Business Review discussed this in 2019 in its article The Elusive Green Consumer.

When your eco-friendly business is not generating enough revenue, you may not be able to make EMI payments in a timely manner. It is for this reason that lenders reject your business loan application if your business does not generate any income or it is not enough.

6. Incomplete or incorrect information

Any errors or incomplete information in your business loan application may result in rejection by the lender. That’s not all. If the supporting documents you provide are incomplete or contain errors, you may also face rejection. That’s why it’s important to double-check all information before submitting your business loan application.

7. Little or no activity history

Lenders usually ask you to provide proof of the company’s track record when submitting its financial statements. If your business is very young and with little or no track record, many lenders may be hesitant to give you a business loan and may even reject your application.

8. Inability to provide guarantees

All business loans are unsecured. Some lenders may even ask you to pledge an asset as collateral to qualify for the loan, failing which your application may be rejected. However, you can circumvent this problem by applying for an unsecured business loan.

Avoid common mistakes when looking for a loan for your green business

You will probably need financing for your eco-responsible business. Unfortunately, your loan can be refused if you are not careful with what you are doing.

Now that you know the common reasons for business loan rejection, make sure you avoid them. This way you can increase your chances of getting a business loan approved. Also remember to always check the business loan eligibility criteria before applying.