In your entrepreneurial journey, you might find that it’s difficult to get approved for a business loan even if you’re showing traction and have a solid business plan. Getting declined for a business loan is incredibly common, as disruptive as it is to your plans for growth. Here’s how you can take control of the situation if a lender decides not to fund your loan.
1. Find Out Why Your Loan Application Was Declined
While you’re unlikely to change the lender’s mind once they reject your loan application, it’s helpful to ask them why they rejected it. An explanation letter can provide you with a thorough road map so you know what needs to be addressed before you again try applying for a business loan. The lender might note that your business purpose did not satisfy them, or you lack collateral, along with any other reason why they declined your application.
Use this information to better prepare for your next loan application, or determine if a loan is even right for your particular business model or purpose.
2. Improve Your Business Credit Score
Creditworthiness is a major component in applying for a business loan. Business and personal credit scores are separate concepts, but when it comes to business loans, both will be examined in the loan application process. If a review shows you are poorly managing your credit, or if there are other discrepancies — such as an identity thief taking out a credit card in your name — it could lead to your business loan being declined.
Having too much personal debt can also impact your ability to get approved for a business loan. For example, if you are paying off credit cards and are co-signed to your child’s student loans, it will show up on your credit report — even if your child is handling the repayments. Assess which debts you can prioritize repaying faster, or have your name removed from certain debts. A major life change such as marriage, divorce, the birth of a child or sending your child to college can also affect your personal credit.
Even if the explanation letter from the lender didn’t cite credit as a reason for rejecting your loan application, it’s always best to work on improving your credit score. Excellent credit scores help you in the long run as you maintain good standing with lenders. If you haven’t yet established credit as a business, now is a good time to do so. However, establishing credit as a business can be challenging. This is because timely bill payments, including credit cards, made under your business name instead of your personal file are not automatically reported to credit bureaus the way personal accounts are. To help with that, ask a vendor or commercial landlord to report your timely payments to business credit bureaus such as Experian or Dun & Bradstreet if you have a DUNS number. You can also open a credit card in your company’s name so it will get sent to credit bureaus without having to request it.
3. Apply for Different Types of Financing
After some reassessment, you might realize bank loans aren’t the right type of financing for your particular needs, business goals or business model.
Banks tend to favor capital-intensive businesses with tangible assets such as vehicles and equipment. If your business model doesn’t require significant assets with a title that can be claimed in the event you default on the loan, you might continue to struggle getting approval for a bank loan. If you don’t want to seek other types of financing, however, you need to drastically improve both revenue and total cash on hand before applying for a loan again.
Today, there are several other types of small business financing including crowdfunding, factoring, trade credits, incubator programs, grants and business credit cards.
A credit card or revolving line of credit is a better option for your business if you don’t need to borrow a large sum of money and if you’re facing a financial shortfall because of an immediate, short-term problem — such as a slow season or losing a major client.
Crowdfunding can be a viable route because it’s both a funding and marketing strategy for your business. You can show your business plan to equity-based crowdfunding platforms, such as AngelList and Fundable if you’re interested in seeking out investors. You can also turn to sites such as Kickstarter and Indiegogo for rewards-based crowdfunding.
Factoring services will base your loan amount on your receivables — payments clients or customers owe your company. This option makes sense if cash collection is slow and the current state of your cash flow would disqualify you for a traditional business loan. Factoring companies buy your receivables, giving you about 70%-90% of their value in 1 or 2 installments.
These different types of financing might be able to serve your needs in the short term if your business loan is declined and you’re now applying to more lenders or waiting to re-apply with the same one, or completely replace your need for a loan.
4. Consider Alternative Lenders
According to the FDIC, large commercial banks (banks with more than $250 million in assets) primarily lend to other large businesses, with only 11.6% of loans going to small businesses. Inversely, small business loans comprise 78.7% of smaller banks’ commercial loans. The personal touch that you get with a small bank, and the more dire need for your business, can be all the more reason to seek them out if large bank chains routinely decline to fund your business loan.
Credit unions and community development financial institutions (CDFIs) are options if you’d like to use a somewhat traditional lender, but are not having luck with banks. Credit unions are often based on residency or industry, while CDFIs tend to be located in economically devastated regions and provide additional business counseling to borrowers so the loans help revitalize the area. You can research CDFIs by the state as well as the federal directory, Opportunity Finance Network.
There are also numerous alternative lenders and lending marketplaces, most of which operate online, such as Kabbage and Fast Capital 360. Digital payment processors such as PayPal offer their own financial products to small business owners based on sales history and do not entail a credit check, which can be a viable option if you have poor or no business credit. Some of these alternative sources like PayPal Working Capital Loans can disburse funds within 24 hours after approval. The financing application and approval process is also a drastically smaller window of time.
Getting rejected for a bank loan can be disappointing, but it does not mean an end to your entrepreneurial journey. Use it as an opportunity to find out where your business can improve so you can apply again with stronger financials and a more well-defined business purpose, or perhaps move on to other types of financing that best serve your company’s immediate and long-term needs.