You’re about to make your business dream a reality and then you learn that your small business loan is denied. While this is disappointing, a ‘no’ isn’t forever – it simply means that you have more prep work to do or that it wasn’t the right loan, from the right lender, at the right time.
Here are practical steps you can start today to better position yourself during the loan application process so you can get the financing you need, even after you’ve had a denial.
How can you get your business back on track?
If your business loan is denied, these are the three simple but effective steps that can get you back on track for a small business loan:
- Learn why your loan was denied: Your lender will usually include a brief explanation in their letter and you may gain more insight by scheduling a meeting or a call. They may even recommend other lenders who can help. This could include alternative lenders that specialize in loans for small businesses – even if you haven’t qualified for traditional loans.
- Address issues under your control: Although there are some reasons you can’t easily fix, such as the length of time that you’ve been in business, many issues can be within your control. Focus on those you can address and take the recommended steps below to fix those issues.
- Reapply: Reach out to other lenders that offer small business loans in your area. The SBA Lender Match tool is a great place to find small business financing. The tool is designed to help businesses in all stages find the funding that fits their needs.
How to fix common business loan denials
Here are some of the common reasons that loan applications are denied, steps to improve or fix each issue, and areas where alternative lenders may have more flexibility. Remember, sometimes getting the financing you need is more about finding the right lender for you.
1. Low credit score
Lenders review your personal credit history and have minimum credit scores they’ll accept. Traditional lenders, like banks, typically require higher credit scores, while alternative lenders have more flexible criteria. Alternative lenders will also look at the bigger picture of your credit story and help you address credit challenges.
A low credit score may mean that you have a short credit history or that you’ve been diligent about not using credit (which, while financially responsible, doesn’t contribute to building your credit history). And sometimes, things happen that lead you to use more credit than usual, such as an unexpected expense. However, a low credit score can also signal overuse of credit, a history of missed payments, or other financial difficulties.
What you can do
Regularly monitor and review your credit reports for accuracy. Free online apps like Credit Karma are easy to use and offer insights, tips, and credit score updates. If you need to repair your credit history and raise your score, steady progress to address issues can yield results in just a few months.
Be sure to always pay your existing bills and debts on time. Automated payments can make this easier to manage, as long as you always have enough money in your account. Also, you should only use the amount of credit that you can pay off each month. If your credit history is brief, consider using credit-building products or services.
If you’ve been in business for some time, you’ll also want to review your business’s credit history– although lenders usually review personal credit score , establishing a positive business credit history can strengthen your position.
2. High debt-to-income ratio
Lenders look at how much of your business’s revenue and your personal income are used to pay for existing and potential debt, then determine whether you can comfortably handle additional debt.
What you can do
Review how much debt you’re currently carrying. Are there debts that can be paid off (such as some credit-card balances) without harming your ability to pay ongoing expenses (like rent)?
If you can reduce your outstanding debt, you’ll improve your debt-to-income ratio. Also, prioritize paying your high-interest debt first. This will gradually reduce the amount of each payment that goes to interest while increasing the amount paid toward the principal.
If you have existing business debt with high interest rates, such as outstanding business credit card balances, see if you can negotiate lower rate with your lender. You may also be able to consolidate multiple debts into one lower-cost loan. This can help you pay down your existing debt faster while freeing up your business’s cash flow. And, of course, you should avoid taking on new or unnecessary debts.
3. Insufficient cash flow
If you’re already in business, you’ll need to show that you have the right cash flow to comfortably make your payment each month or show how the loan will improve your cash flow.
Simply put, if you can’t demonstrate that your business’s cash flow can support the additional monthly debt payment, you won’t be approved for a loan.
What you can do
Review your financials and find areas where you can improve profitability or decrease costs. For example, you can:
- Analyze and optimize your business’s billing and collections processes
- Review and manage your business’s expenses
- Negotiate better terms with your suppliers
- Create multiple revenue streams to stabilize your business’s income.
4. Lack of collateral
Depending on the type of loan or lender, you may need collateral to secure your loan, such as your home. However, this requirement varies from loan to loan.
To put it another way, if a traditional loan requires collateral and you don’t have enough to cover the loan, your lender may not approve your loan application or refer you to a different loan program.
What you can do
If you were denied because you didn’t have enough collateral, there are other loan options available with more flexible collateral requirements, such as the SBA 7(a) loan.
5. Incomplete application or documentation
An experienced lender will usually review your application and documents before submission. If important documents are missing, it could show your lender that you’re disorganized and not ready for a loan.
In some cases, a lender may not be able to approve your loan based on the documentation you submitted, even if you submitted a complete loan package.
For example, if you are applying for a loan at the beginning of the year, and your previous year-end financials look promising but inaccurate, your lender may require you to file last year’s business and personal tax returns and reapply after. This is because tax returns are more accurate, and it’s easier for a lender to base approval on those numbers rather than data reported on a year-end profit and loss statement or balance sheet.
What you can do
If you learn that you were denied for this reason, talk to the lender to see if you can address the issue(s) and resubmit your application. Take some time and review your application to ensure you’re fully prepared to apply for a loan. If you’re denied because of inaccurate or unreliable interim or year-end financials, it is a “no for now,” and you’ll be encouraged to reapply after your tax returns for the preceding year are filed.
6. Incomplete (or unconvincing) business plan
Your lender will review your financial projections and ask you questions about how you plan to achieve them. When lenders find flaws in your plan, they may see “red flags” that you’ve overlooked (or underestimated). While an incomplete business plan may not appear as a reason in a denial letter, it’s something that you may learn from a conversation with your lender.
What you can do
When you receive this feedback, spend time strengthening your business plan, from competitive research and marketing plans through your financial projections. Be sure to develop clear and realistic financial projections with contingency plans and regularly update your plan to reflect market conditions and business goals. It’s also a good idea to get feedback from mentors or industry experts.
7. Limited business history
Traditional lenders usually can’t finance startups or early-stage businesses (two years or less of operations). When a bank makes a loan, it takes on a certain level of risk, which means a business needs to meet certain criteria that startups or early stage businesses can often have trouble meeting.
It can be as simple as your business not meeting the minimum time in business requirements or your cashflow isn’t stable enough (right now) for your bank to be comfortable issuing you the loan to take on the additional debt payments.
What you can do
Your business history isn’t totally within your control, so to address this issue you can look at other options. Alternative lenders and those that offer programs like the SBA 7(a) program or the new Main Street Capital Loan Fund are more likely to help you get the financing you need. You can find one by reaching out to your local Small Business Development Center (SBDC) or through the SBA Lender Match tool.
8. Industry Risks
Some lenders simply don’t lend to small businesses in particular industries, due to what they see as inherent risks. These vary from lender to lender but often include fields like retail, restaurants, and childcare.
What you can do
Again, unless you decide to start a different business in a less risky industry, there’s not much you can do to address this. However, you can look at other lending options. Reputable alternative lenders offer loans to a range of industries, including many that are considered “higher risk.”
9. Legal or regulatory issues
If a lender had a legal or regulatory reason for denying your loan, you’ll need to resolve this before moving forward.
For example, some loan programs have certain criteria for your business to be eligible. If you don’t meet those requirements or have past legal issues, that could be a reason for your loan application to be denied.
Another regulatory reason that could cause your business loan application to be denied is if you aren’t eligible according to the SBA. If you’re operating in an industry that’s prohibited from getting financing by the SBA, have past due child support, or have student loans that are in default, these are all reasons why your business loan application could be denied.
Outside of regulatory reasons, one of the most common legal reasons why your loan could be denied is if you fail to disclose or misrepresent your business’s financials or assets.
What you can do
For regulatory issues, speak with your lender to learn more about how these can be resolved. Of course, there may be some regulatory issues that are out of your control. If your business is in a prohibited industry or is ineligible for the loan options you’re reviewing, you’ll have to look at other options. If your loan application was denied for legal reasons, reach out to your attorney to find out what to do next.
What small business loan options are available?
If you’ve had a business loan denied – or if you haven’t applied for financing because you think your loan will be turned down – don’t give up. Instead, look for a lender that’s a better fit for your business. Alternative lenders have flexible lending criteria that can make your business dreams a reality. For example:
- SBA loans: These can finance nearly any business need for businesses in every stage. They include loans from $10,000 to $5.5 million (depending on the project), low down payments, and flexible collateral requirements, including loans that don’t require additional collateral. SBA loans also offer longer repayment terms to make monthly payments more affordable.
- Other loan programs: There are also more financing options out there. These include a business line of credit and the SmartLoan, which offers financing from $10,000 to $100,000, a simple online application, a quick approval process, and funds that can be deposited within five days of approval.
Pursuit can help, even when you’ve had a business loan denied
At Pursuit, it’s our mission to support small businesses like yours with affordable loans and business resources that support your success at every step. We have more than 15 loan options and a line of credit that are available throughout New York, New Jersey, Pennsylvania, Connecticut, Nevada, Illinois, and Washington.
Start your application today to keep your business growing!
