5 Reasons Debt Financing Applications are Rejected

At some point in the startup journey, every entrepreneur faces rejection when raising funds. Often, the advice is to “keep trying,” but when it comes to debt financing, it’s not about pushing harder — it’s about being smarter.

Being smarter means understanding and addressing the common reasons for loan rejections so you can significantly improve your chances of securing debt financing in the future. In this short blog, we summarize the top 5 most common reasons applications are rejected. 

1. Cash-Basis Accounting Practices

In cash-basis accounting, transactions are recorded, and revenue is recognized when cash is received or paid out. Unfortunately, this type of accounting doesn’t provide an accurate picture of a SaaS company’s financial health since it doesn’t consider accounts receivable, accounts payable, or any outstanding liabilities. As a result, loan applications by startups that use cash-basis accounting are often rejected.

Accrual-basis accounting is the standard method under generally accepted accounting principles (GAAP) in many countries. Debt providers prefer accrual-basis accounting as it provides a more accurate view of recurring revenue recognition, revenue and expenses, compliance and reporting, and more. Learn more about why you should make the switch to accrual-based accounting.

2. Declining Growth

A trend of declining or flat year-over-year growth, declining quarter-over-quarter growth, and high churn are red flags for lenders. This indicates potential issues in the business model, market saturation, or operational inefficiencies, suggesting that the startup may not sustain long-term profitability.

To fix this, founders should address the root causes of declining growth. This might involve pivoting your business strategy, exploring new markets, or innovating your product or service offerings. Demonstrating a clear plan to reverse the trend and showing potential for future growth can reassure lenders of your business’s viability.

Lenders like TIMIA will take the time to examine your business and understand the nuances. For example, perhaps your quarter-over-quarter declines are due to seasonality in the industries you serve or perhaps due to longer enterprise sales cycles.

3. High Net Burn

High net burn — i.e., the rate at which a startup spends capital to finance overhead before generating positive cash flow — is a concern for lenders as it signals that the business might not be sustainable in the long term, especially in a down economy. 

At TIMIA, we look at net burn relative to monthly recurring revenue (MRR). Companies that are burning more than 50% of their MRR, have a low net margin, and/or have less than 12 months of runway are a concern.

Founders should address the causes of high net burn by tightening operational expenses, exploring cost-effective strategies, and focusing on revenue-generating activities. A clear plan to reach a break-even point or profitability can also reassure lenders. Also, if you can show a downward trend to your burn or demonstrate that you can control costs when you need to, you will be in a more favorable position for debt.

4. Too Much Senior Debt

Having excessive senior debt can make lenders wary, as it implies that there are already significant financial obligations ranking above any new debt.

At TIMIA, we can subordinate to a senior lender up 1x MRR, depending on the company. However, we don’t want to come in to simply replace another lender — we also expect you to deploy working capital that will actually help the company grow. 

We also look at the context — can you service the debt, and are you breakeven or EBITDA positive?

5. Low Customer Concentration

Dependence on a limited number of customers for a significant portion of revenue is considered a high-risk factor by lenders, as the loss of even a single customer can significantly impact the business’s financial stability. 

At TIMIA, we consider it to be risky for a startup to have fewer than 10 customers, or 2-3 customers accounting for the majority of revenue.

However, we do look at the context. Perhaps you have large, sticky enterprise or government contracts or reseller agreements. In this case, the risk is lower.

Either way, it’s good to diversify your customer base to reduce reliance on a few major clients. Demonstrating a broad and diverse client portfolio can reassure lenders of your business’s resilience and revenue stability.

Securing Debt Financing

Remember, rejection isn’t the end of the road — it’s an opportunity to reassess, improve, and approach your financial strategy with renewed clarity and purpose. As a startup, resilience and adaptability are your greatest assets. Use them to navigate the financing landscape, and you’ll be well on your way to securing the funding you need to grow and succeed.

To learn more about this topic and to dive into some of the trends the TIMIA team sees in its debt applications, check out our recent webinar: Reasons Venture Debt Financing Applications Are Rejected.

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