What to Do If You Can’t Get a Business Loan

What to do when you can’t get a business loan

You’ve applied for business loans and been turned down. Now what? Follow these steps to get back on track:

1. Find out why you were denied.

When you receive a notice that a lender won’t approve your loan, it should state why you’ve been denied. It may list general reasoning, such as, “Your current financial situation makes it impossible for us to approve this loan.” If this is the case, call or email the loan officer to get as much detail as possible about why you were denied. 

Reasons for rejecting a business loan application vary, but the following factors are commonly cited:  

• Poor credit score: Your personal and business credit scores directly impact loan approvals. The lower your credit score, the more challenging it is to obtain funding.
• Lack of collateral: Many lenders require business or personal collateral, such as stocks and bonds or property assets like buildings, equipment and vehicles. If you don’t have enough collateral to back the loan, you could be denied.
• Too much debt: Lenders look at your debt-to-income ratio to determine your creditworthiness. Lenders want the ratio in the 30 percent range, but some will go as high as 40 percent.
• Not enough cash: To lower the risk of defaulting on your small business loan, lenders typically want to see enough cash in the bank to cover several months of expenses. Depending on your lender, this could be anywhere from three to six months.
• Not enough years in business: Many lenders require a set amount of time in operation to be eligible for a business loan. For some lenders, this is three months, while for others, it may be two years. They want to ensure you won’t borrow money and go out of business three months later.  

2. Work to rectify fixable problems. 

Depending on the circumstances, you may be able to fix the problems that caused your loan application denial. For example, if you didn’t complete your application or must submit additional paperwork, those are easy issues to address. If you were turned down because of your debt-to-income ratio, you could try paying down your debt and reapplying at a later date.

However, there may be more far-reaching problems to rectify. These situations require longer-term fixes (see below). 

3. Work on improving your odds of landing a bank loan. 

If you were denied a business loan because of a poor credit score or insufficient cash flow, you could work on increasing the odds of getting your business bank loan approved. Your goal is to improve how you look in the lender’s eyes.

• Improve your credit score. You typically need a credit score of at least 680 to get a bank loan. If yours is lower, work to improve it. Pay your bills on time, reduce outstanding debt and don’t open new credit lines. The longer you work on these factors, the more your credit score will improve. It may take a few months or longer, but hopefully, you’ll be in a better financial position to get a loan.
• Bolster your cash flow. Healthy cash flow is essential to obtaining a term loan or line of credit. Lenders want to ensure they receive a return on their investment, and cash flow problems are a deterrent. Demonstrating that you can bolster your cash flow before receiving an influx of capital is a surefire way to prove to potential investors that lending you money is a viable investment. Making more money is a guaranteed way to improve cash flow. However, you can also do the following: 
  • Reduce preexisting debt. Few creditors want to lend businesses money to repay debts to other investors. Properly managing and increasing your small business’s cash flow is essential to long-term economic success in a competitive marketplace.
  • Cut expenses. Find ways to reduce business expenses. Every enterprise has some waste hidden beneath the surface. You may rely on outdated or inefficient technology, or perhaps your workforce needs some paring down. Examine your current business setup and determine ways to cut unnecessary elements.

4. Create a short-term plan in lieu of a business loan.

If getting a business loan was your plan A and you need money now – and there’s no time to rectify long-term issues – it’s time to develop plan B. Consider why you needed the capital infusion, and find ways to pivot. 

For example, if your goal is expanding your business, look at new ways to boost income without needing a significant capital investment. You could try the following:

• Use email marketing to grow your business.
• Investigate co-marketing with a strategic partner.
• Work on social media marketing. 
• Implement social selling strategies on your social platforms. 

However, you may need to delay your plans until you have the necessary funds or reduce business expenses until you can afford to invest in your goal.  

5. Investigate alternative funding sources.

Business bank loans are only one of many funding options. Consider the following: 

• Find an angel investor or another type of business investor. 
• Take on a business partner.  
• Dip into your personal savings. 
• Borrow money from family or friends. 
• Get a personal loan. 
• Apply for a small business grant. 
• Apply for a business credit card.

Additionally, depending on your unique situation, one of the following business loan alternatives may be right for you:

• Alternative lenders: Alternative lenders offer ways to access the capital you need to grow your small business. Read our review of SBG Funding, our review of Rapid Finance and our Crest Capital review to learn about several highly rated alternative lenders that may be able to accommodate your unique situation. 
• Lines of credit: A line of credit is an agreed-upon amount a lender – usually a bank but can also be an alternative lender – extends to a business. You can draw on this line of credit as needed, but you will pay interest on the amount you use until it is paid off. If you qualify for a line of credit, it’s a great way to access emergency funds quickly without having to jump through too many hoops. 
• Short-term loans: A short-term loan is any loan you’re expected to repay in a year or less. Banks don’t usually offer these loans, but they are quite common for alternative lenders. As the name suggests, short-term loans are beneficial when you must cover a one-time cost or need a small boost to kick your business into gear.
• Invoice factoring: Invoice factoring is a type of alternative funding in which a company sells its outstanding invoices to a third party. The invoice factoring company generally pays 85 to 95 percent of the invoices’ value, giving your business cash fast. Once a client pays their invoice, the remainder of the original invoice is paid to you, minus a small fee that remains with the factoring company. This type of loan is ideal for businesses that regularly have outstanding invoices straining their cash flow.
• Merchant cash advances: A merchant cash advance is money a lender provides a business upfront in exchange for a percentage of its credit card sales over a specific time frame. This alternative financing option is ideal for stores with a high volume of daily credit card sales, such as restaurants and boutiques.
• Microloans: A microloan, typically $50,000 or less, is designed to get small business owners on their feet. These loans are generally not available from banks, but alternative lenders provide them to businesses that must acquire new equipment, open a new location or hire staff.
• Equipment financing: As the name suggests, equipment financing loans are used to purchase mission-critical equipment. Unlike other loans, the equipment acts as collateral, lowering interest rates. If the equipment is valuable enough, the application approval process may run much more smoothly because the equipment mitigates the lender’s risk.
• Crowdsourcing: Crowdsourcing, also called crowdfunding, sources funding from large groups of people. In most cases, it means taking your case directly to the public and reaching out to thousands, or even millions, of people at once via social media campaigns. Crowdsourcing your business’s capital needs will work only if you can persuasively convince a mass audience to get behind your plans. It’s particularly popular among startups, but even well-established business owners can rely upon the method if they know what they’re doing.
• SBA loans: SBA loans are backed by the U.S. Small Business Administration and offer business borrowers flexible loan sizes, low interest rates and extended repayment terms. The SBA doesn’t provide loans; instead, it guarantees the loans issued by an SBA-preferred lender or financial institution. The three main types of SBA loans are:
  • 7(a) loans: These are the SBA’s primary loans for small businesses. Interest rates vary based on the borrower’s credit score. With this loan, you can borrow up to $5 million.
  • SBA microloans: These are smaller loans ranging from $10,000 to $50,000. They are aimed at borrowers who need money to get a business up and running. 
  • 504 loans: These are long-term, fixed-rate loans that small business owners can use to expand or modernize their operations. They can be used to buy expensive equipment or for real estate. Terms for these loans run from 10 to 25 years. 

Businesses that pursue alternative financing must understand that these funding options often come with exceptionally high costs. Alternative lenders aim to ensure a return on what may be considered a “risky” investment. It’s wise to factor in the cost of alternative financing before pursuing this option. 

Jennifer Dublino contributed to this article.