My loan was denied — what do I do now? It’s a common question for business owners who have ever had their applications turned away, and that’s not a particularly rare situation to be in. Small Business Trends reported that small business loan approvals from large banks are down 50%.
Small business loans can be denied for a range of reasons, from a business owner’s credit rating or debt ratio to the company’s cash flow or length of time in business. No matter what causes a loan denial, it often leaves small business owners wondering what to do next.
Find Out Why Your Small Business Loan Was Denied
Often, a loan denial will come with an explanation. If it doesn’t, reach out to the lending officer.
“Get the insights on what factors were taken into consideration during the process and where the lender had concerns,” advises small business finance and loan consultant John Turner. “In some cases, there’s a specific issue with your application that needs to be addressed. In others, you might find out you’re a better fit for a different loan product or lender.”
Currently, legislation is under consideration to provide greater insights into why small business loan rejections occur overall, but Turner notes some common reasons include:
- The small business owner has a poor credit score or has experienced a major credit event, such as bankruptcy.
- The business — or the business’s owner — is already carrying significant debt.
- The business has cash flow issues that could make it less likely to support timely repayment.
- The business might not have operated for long enough, or it may be operating in an industry that lenders perceive as risky or don’t understand.
- Underwriters may be concerned with the business plan or the intended use of funds.
“By finding out specifically where there are issues with your application, you can create a road map to approval,” says Turner.
Learn How You Can Succeed Next Time
With the feedback in hand from your previous denial, take a hard look at your overall finances.
“It’s important to start by addressing the key issue that drove your last denial. But now is also the right time to step back and make sure that you’re presenting as a strong candidate overall,” advises Turner.
Here are a few things to examine.
Your credit score and history
How is your credit score? What steps can you take to improve it? Options might include paying down debt to lower your debt-to-income ratio or prioritizing on-time payments to lift your score. Removing inaccuracies can also help raise a flagging score.
Your supporting documents
Strong financials can help make your case. Ensure you have up-to-date financial projections and all supporting documents are in order. If you have any issues, such as tax challenges or weak record-keeping, remedy those so you’re starting on strong footing.
Your cash flow
What does your recent cash flow history look like? What are your projections built on? If you’re weak in this area, there are two possible solutions. The first is to strategize your spending to prove your organization can generate the necessary cash flow. The second is to provide documentation for the data driving your cash flow. Copies of purchase orders, contracts and other commitments can help strengthen your projections.
Determine exactly how much money you need and how it will be spent. A strong business plan can help you showcase how the investment will help your business grow and what you’ll do to maximize the return. Your business plan can also be a strong place to highlight how your business works and how you control for risk (if it’s in an industry that may concern lenders).
If your small business loan was denied, it may be because lenders perceive your business as a high risk. To further reduce your risk, consider what you could use as collateral for the loan. A bank may be more likely to approve a small business loan that’s secured by property or industrial equipment, for example.
Consider Other Types of Loans and Lenders
Not all lenders or loan products are made equal, says Turner. You should be prepared to explore different loan products, including traditional loans, SBA loans and lines of credit. Depending on how much you need to borrow and how long you want to repay the debt, numerous solutions are on the market.
Your choice of lender is also important. “Today, you don’t just have the choice of one bank. Business owners can decide to go with a credit union or a fintech platform that may take different factors into account,” he notes.
For example, alternative lenders may base their decisions in part on sales — or even factors such as education — and not solely on traditional bank metrics. This can help strengthen the case when someone isn’t the textbook loan candidate.
Adjust Your Approach
If your loan was denied (especially more than once) it may be time to change your approach.
“The number one mistake I see in this situation is a business owner trying to go through the process again without adapting,” says Turner.
So, if what you’ve already done hasn’t worked, pivoting your strategy can help. Some solutions to consider include:
- Work with a professional: Hire a professional such as an independent loan consultant or CPA with expertise in this area to assess your loan application package. They may also be able to help you produce stronger assets, such as a business plan narrative or clear financials.
- Take a step back and give yourself time: The loan application process can take time, especially if your unique situation is complex. Plan ahead, says Turner, and do as much as possible ahead of time. An anxious business owner can send up a red flag, while a patient and confident one signals an investment that mitigates risk.
- Work with a new type of lender: Have you been declined repeatedly by big banks? It may be time to consider talking with an alternative lender about its small business loan options to explore if it’s a better fit.
Apply for Your Next Loan
A denied business loan application doesn’t have to signal the end of your dreams. However, it does mean it’s time to ask questions, dig deep into your financial standing and present a stronger loan application the next time around.
If you’re thinking, “My loan application was denied!” and you’re hesitant to try again, remember this: There are many paths up the mountain of success.