You’re about to make your business dream a reality and then you learn that your small business loan is denied. While this is devastating, 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.
Three steps: Learn why, address the issues, then reapply
If your business loan is denied, three simple but effective steps 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 be able to gain more insight by scheduling a meeting or a call. They may even recommend other lenders who can help. These include alternative lenders that specialize in loans for small businesses – even if you haven’t qualified for conventional loans.
- Address issues that are under your control. Although there are some reasons that you can’t easily fix (such as the length of time that you’ve been in business), many issues are within your control (like your business’s cash flow or debt-to-income ratio, for example). Focus on those that 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.
Common reasons business loans are denied and how to correct them
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 that they’ll accept. Conventional lenders, like banks, typically require higher credit scores, while mission-driven 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). Sometimes, too, things happen that lead you to use more credit than usual, such as when an illness or divorce temporarily strains finances. However, a low credit score can also signal overuse of credit, a history of missed payments, or other financial difficulties.
How to fix it: 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, only use the amount of credit that you can pay off in full each month. And 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.
How to fix it: 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 might 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, avoid taking on new and/or unnecessary debts.
3. Insufficient cash flow
If you’re already in business, then you 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 debt payment each month, you won’t be approved for a loan.
How to fix it: Review your financials and find areas where you can improve profitability and/or decrease costs. For example, to improve your business’s cash flow 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 be required to provide collateral to secure your loan, such as your home. However, this requirement varies from loan to loan. To put it another way, if a conventional loan requires you to put up 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.
How to fix it: If you were denied because you didn’t have enough collateral, there are other options available that have 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 prior to submission. If there are important documents that are missing it could show your lender that you’re disorganized and aren’t ready for a loan.
How to fix it: 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.
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.
How to fix it: 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. In addition, seek feedback from mentors or industry experts.
7. Short business history
Conventional lenders usually can’t finance startup or early-stage businesses (two years or less of operations). When a bank makes a loan, they take on a certain level of risk, which means a business needs to meet certain criteria, that most of the time startups or early stage businesses can have trouble meeting. It can be as simple of a reason as your business doesn’t meet the minimum time in business requirements or that 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.
How to fix it: 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 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 child care.
How to fix it: Again, unless you decide to start a different business in a less risky industry, there’s not much you can do to address this, but 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
For example, some loan programs have certain criteria for your business to be eligible. If you don’t meet those requirements, 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 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.
How to fix it: 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.
Small business loans to support your success
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, among Pursuit’s most popular options are:
- 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 Pursuit loan programs: Pursuit offers several of our own financing options. These include a business line of credit and our SmartLoan, which offers financing from $10,000 to $100,000, a simple online application, and a quick approval process – funds 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, and Connecticut. Contact us today to learn how we can work together to keep your business growing!
