Business loan declined in Canada? Find the reason, fix it and reapply

If a Canadian lender declines your business loan, ask for the specific reason in a conversation with the account manager, then fix that reason before you apply anywhere else. Most declines come down to a handful of causes: cash flow too thin for the payment, too little owner equity or security, a short or loss-making history, personal credit problems, tax arrears, or a request that does not match the use of funds. Many can be solved by changing the request: a smaller amount, a longer amortization, a lease for part of the cost, or a government-backed loan through the same or another lender.

This guide is part of business loan mistakes to avoid. Figures are illustrative.

Step 1: get the reason

Lenders are not generally required to give a business borrower a written reason, but most account managers will explain the main concern if asked directly. Ask:

Which ratio or condition failed, and what level would have passed?
Was it the amount, the term, the security or the guarantor?
Would a smaller amount, a longer term or a CSBFP loan change the answer?
Can the decision be reviewed if you provide more information?

Write down the answer. It is the basis for everything else.

Step 2: match the reason to a fix

Reason given	What it usually means	Possible fix
Insufficient cash flow / DSCR	Payments too high for earnings	Borrow less, extend amortization, refinance other debt, show a forecast that includes the asset's earnings
Not enough equity	Owners funding too little of the project	Add savings, bring in a partner, phase the project
Insufficient security	Assets do not cover the loan	CSBFP or BDC loan, a smaller amount, specific security on new equipment
Too new	Under one or two year-ends	Start-up programs such as Futurpreneur, Community Futures, CSBFP
Personal credit	Missed payments, high utilization, collections	Pull your reports, correct errors, pay down personal debt, wait for recent issues to age
Tax arrears	GST/HST, payroll or income tax owing	Pay or arrange a payment plan with the CRA, then reapply
Industry risk	Lender's policy limits on your sector	Try a lender active in your industry, a credit union or BDC
Incomplete file	Missing statements or plan	Complete the application checklist

A worked example: restructuring the request

A print shop asked for $400,000 over 7 years at an illustrative 8%. With $108,000 of cash available for debt service and $24,000 of existing payments, its debt service coverage ratio would have been about 1.09, below the lender's 1.25 minimum. That calculation is set out in the DSCR worked example.

Options the shop could take back to the lender:

Reduce the loan to about $333,000 over 7 years, the most the 1.25 minimum supports, and fund the rest from cash or by delaying part of the fit-out.
Lengthen the amortization to 10 years, which supports about $428,000 at the same ratio, if the lender accepts 10 years for this asset.
Lease the printer separately, so the loan covers only the fit-out; the lease payment still counts in the ratio, but leasing companies may accept it on different terms.
Use a CSBFP loan for equipment and leasehold improvements, where federal risk sharing may make the lender more comfortable with the security shortfall.

Step 3: check your personal credit

Request your free credit reports from Equifax Canada and TransUnion Canada, check for errors and dispute any you find with the bureau. Common problems are accounts that are not yours, old debts shown as unpaid, and incorrect late payments. If your reports are accurate but weak, the fix is time and consistent payments.

Step 4: decide where to apply next

The same lender after fixing the issue; a second application with the problem solved is often approved.
A credit union or caisse, which may weigh local knowledge and relationship differently.
BDC, which describes its role as complementary to private-sector lenders.
A CSBFP lender: not every branch uses the program; ISED's finance map lists participating lenders.
Regional development agencies and Community Futures for some regions and sectors.
Avoid jumping straight to high-cost alternatives such as merchant cash advances without converting the cost into an annual rate.

Space out applications. Several credit checks in a short time can be noticed, and each lender will ask whether others declined you.

If you think the decision was unfair

A lender can decline on business grounds, and there is no right to a loan. But if you believe you were treated unfairly, for example the lender broke its own stated process or gave inaccurate information, use its complaint process; see the complaints guide. If you believe a decision was based on a prohibited ground of discrimination, such as race, sex or disability, a complaint against a federally regulated bank can be made to the Canadian Human Rights Commission; provincially regulated lenders such as credit unions fall under provincial human rights law.

Frequently asked questions

Does a declined application hurt my credit score?

The credit inquiry may show on your personal report for a time, but the decline itself is not reported to the bureaus.

How long should I wait before reapplying?

Until you have fixed the reason. That might be a week for missing documents, or a year-end for weak results.

Should I use a loan broker?

A broker can find lenders you would not reach yourself, but ask how they are paid and whether you pay a fee. Never pay an upfront fee for a "guaranteed" approval.

Can I appeal to the government if my CSBFP application was declined?

No. Under the CSBFP the lender alone decides; ISED does not review credit decisions.

Sources

Equifax Canada and TransUnion Canada — free personal credit reports and disputes
Innovation, Science and Economic Development Canada — CSBFP and the finance map
BDC — complementary lending to small businesses
Canadian Human Rights Commission — discrimination complaints against federally regulated organizations
Canada Revenue Agency — payment arrangements for tax debts