Denied for a Business Loan? What Next?

Updated on:
October 17, 2023

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Getting denied for a business loan is an experience many entrepreneurs and small business owners know all too well. However, it’s important to understand that a business loan denial is not the end of the road. This comprehensive guide will discuss common reasons for denial, and explore various other financing options that could be better suited for your business needs.

1. Understanding Reasons for Business Loan Denial

A denial for a small business loan doesn’t materialize out of thin air. There are often clear reasons lenders consider when evaluating your loan application.

Low Credit Score

A credit score plays a critical role in a lender’s decision. Both personal and business credit scores are taken into account. Equifax, Experian, and TransUnion, the main credit bureaus, use payment history, credit utilization, and length of credit history among others, to calculate your FICO score. A poor credit score, whether personal or business, can raise a red flag for lenders.

Inadequate Cash Flow

Your business’s cash flow determines your ability to repay the loan amount. If a lender believes that your business’s cash flow is insufficient to manage loan payments, they might deny the application. This assessment is generally based on your financial statements and tax returns.

Limited Track Record

For new businesses and startups, having a limited track record can be a hindrance. Traditional lenders prefer established businesses with a history of stable revenue and growth. While minimum time requirements vary, it’s common for traditional lenders to require borrowers to have at least two years in business.

Unconvincing Business Plan

A strong business plan is a vital part of a successful business loan application. It should clearly state your business’s objectives, marketing strategy, and financial forecasts. An incomplete or unconvincing business plan can lead to loan denial.

2. What To Do When Your Business Loan is Denied

Being denied for a business loan can feel disheartening, but there are steps you can take to improve your chances of securing financing.

Review the Reasons for Loan Denial

Start by understanding why your business loan was denied. Lenders are obligated to provide a reason for loan rejection. This feedback is crucial as it provides insight into what you need to fix before reapplying.

Improve Your Credit Score

If poor credit or a low credit score was the reason for your loan denial, there are several strategies to improve it. Always make payments on time, try to keep your credit utilization low, and regularly review your credit report for any errors.

Enhance Your Business Plan

Take a closer look at your business plan. It needs to convince lenders that your business is worth investing in. Show clear financial projections and make sure your plan covers all crucial aspects of your business.

Consider Alternative Financing

Being denied a business loan from traditional lenders doesn’t mean you are out of financing options. Alternative lenders, like those offering merchant cash advances, can be an excellent option for small business owners.

3. Looking Beyond Traditional Business Loans

While a business loan might seem like the go-to financing option, there are several alternative financing options that could be a better fit for your business.

Merchant Cash Advances

Merchant cash advances (MCAs) are a viable solution for business owners who have been denied a bank loan or SBA loan. Unlike loans, MCAs provide funds in exchange for a percentage of future revenue. The repayment* is directly tied to your business’s revenue, making this a flexible solution for businesses with fluctuating cash flow. Because MCAs are based on revenues, they also don’t require a conventional personal guarantee. Additionally, MCAs won’t consider bad credit in most instances.

Moreover, online funders typically have a faster application process and less stringent requirements compared to banks. These funders are usually more willing to lend to businesses with a less-than-perfect credit history.

4. Preparing for Future Loan Applications

Proactive preparation can increase your chances of securing business financing in the future.

Maintain Good Financial Health

Keep a close eye on your financial statements, manage your cash flow efficiently, and make tax returns and repayment of existing loans a priority. Regularly check your credit reports and dispute any discrepancies. And remember, your personal credit score is not as vital as your business credit score when funders consider creditworthiness.

Craft a Strong Business Plan

Your business plan is a roadmap for your business and a key component of your loan application. It should provide detailed information about your business, including revenue projections, marketing strategies, and your track record.

Explore All Financing Options

Whether you are denied a loan or not, it’s prudent to explore all financing options available to you. Ask yourself, what type of loan do I need? Maybe it’s not a loan at all that you should be considering. Look at not just business loans, but also merchant cash advances, equipment leasing, online lenders, and other alternative financing options.

In conclusion, a business loan denial is a bump in the road, not the end of it. Use this setback as an opportunity to review and improve your business plan, credit score, and financial health. Remember, there are numerous alternative financing options out there, like merchant cash advances, that may better suit your business needs.

*Repayment in this context describes the process of repurchasing a merchant cash advance. It does not describe the process of repaying a loan. MCAs are legally distinct from loan products.

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