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What to Do If Your Small Business Loan Is Denied

If your small business loan was denied, don’t worry: you still have options. Read on to learn how to move forward and get your business funded.

This is it: the small business loan that you’ve been waiting for is almost here… the one you need to purchase new equipment, hire much needed experts, or button up your holiday inventory. 

You open your email, your excitement building, only to feel your heart sink. 

Denied. 

You’ve sacrificed so much for your business at this stage in the game, and yet you feel like you’re on the verge of losing it all in these uncertain economic times. The hopelessness and frustration are understandable

However, a business loan denial isn’t a dead end—in fact, it can very well be a new opportunity for growth

In this article, we’ll examine the most common reasons behind small business loan rejections and offer pointers on how you can spring back up and move forward (including alternative financing options). 

Why Was My Business Loan Denied?

If your small business loan application was denied, the first step is to figure out why.

Legally, lenders must disclose the reasons behind a denial within 30 days of their decision—this usually comes in the form of a letter or notification.

However, the reasons aren’t always clear, so make it a point to contact the lender for more details and feedback on why your funding request was rejected. Often, the reason(s) for denial is something that you can quickly improve upon to better your chances for an injection of capital in the near future.

That said, here are some of the most common reasons for small business loan denial. 

Low Business Credit Score

Traditional lenders view credit scores as an indication of how well you manage your business’ finances.

When financing institutions like a bank see a low score, they immediately think of missed payments or general mismanagement, which may not necessarily be the case. For example, if you’ve applied for capital numerous times in recent months, this can contribute to a low score as well.

Be informed about your business’ credit score and the factors that determine it, and proactively make decisions to build or improve your business credit. 

High Debt Levels

Lenders will look carefully at your business’ current debt, as it can give them an idea of your business’ ability to repay the money you want to borrow.

High debt levels can be a red flag if earnings do not outpace debt load. The best thing to do is reduce debt levels by making additional payments, consolidating existing loans, or renegotiating terms with creditors.

Insufficient Cash Flow

Cash flow indicates financial stability. Without enough cash, lenders become concerned about a borrower’s ability to pay back debt.

Ultimately, little (or no) cash means that your business, in the eyes of a lender, is unlikely to be able to make loan payments. 

Weak Business Plan

It’s essential to demonstrate that your business is poised to meet market demand in the future.

Be as detailed as possible by providing a well-researched business plan, complete with revenue projections for the next few years. If your business plan was the issue, ask your lender about the specific aspects of the plan that did not meet expectations so you can work to improve it.

Lack of Collateral

Often, lenders minimize risk by requiring borrowers to use their assets as security for a loan.

Think of collateral like insurance: if your business defaults on the loan, the lender can seize the asset to recoup their losses.

If you don’t have enough collateral or your assets are already pledged, your loan application might be denied. Try reconsidering what you offer as collateral or searching for an alternative financing provider that doesn’t require traditional collateral. 

Industry Risks

Traditional financial institutions are interested in providing loans to low-risk borrowers. Certain industries are categorized as higher risk by lenders, like restaurants or construction.

While you can’t change your industry, you can rely on a detailed business plan to demonstrate your future profitability or explore a lender who specializes in your industry

Short Business History

Your past performance offers a preview of future success.

Without a business history demonstrating proven success, a bank cannot assess your ability to repay. Get a year or two of experience before securing financing, and you’ll have the data lenders want to see. 

Incomplete Application or Documentation

The loan application process depends on the type of lender, but if your loan application was lengthy and required a lot of extra documents, make sure that you didn’t miss anything. 

Many applications ask for these standard documents: 

  • Business plan.
  • Bank statements.
  • Tax returns.
  • Profit and loss statements. 

It’s an easy fix if your business loan was denied due to missing or incomplete information—just get it all together. 

Legal or Regulatory Issues

Lenders also examine the moral character of your business. Any legal problems or regulatory non-compliance can be cause for a small business loan denial.

Address these issues by demonstrating character through community involvement or providing insight on how the legal issues or regulatory concerns were successfully handled. 

What To Do After Denial

You went through the rejection letter and pushed through the five stages of grief—after all, it’s just one more challenge in your history of working hard for your dreams and business.

Now what? 

It’s time for action. Here’s your step-by-step plan for moving forward:

  1. Go over the rejection notification: deal with the denial first. Carefully review any communication from your lender regarding the loan rejection, which will likely include the reasons for the denial. 
  2. Seek additional feedback from the lender: remain professional, and show a genuine desire to understand and learn from this experience. Describe your situation to your lender, and be prepared to take notes as you ask for their advice and constructive criticism.
  3. Review your business plan and financials: even if your lender cites other reasons for the denial, take the time to revisit and update your business plan and financial documents. Are they as robust and current as they can be? Does your business plan inspire confidence in future profitability? 
  4. Document the learnings and plan for improvement: remember, a denied loan application is an opportunity to “fail forward.” Detail in writing how you plan to address your business’ weaknesses—from paying down your debt to reaching a specific revenue goal.

Spend as much time  on each step as you need to—this process is important for future success.

Use the information you’ve received to improve the financial health of your business, and start thinking about your next funding application. 

Preparing for The Future

Learning from a loan rejection is important, but you still need funding. Follow these strategic actions to improve your eligibility for future financing. 

1) Strengthen Business Credit

If a poor credit score is standing in the way of your funding, you can actively work to improve it. This process can take time, but it’s worth it.

To strengthen business credit, you can:

  • Check your business credit report for inconsistencies.
  • Pay bills and existing debts on time.
  • Lower your credit utilization—and never max out your credit.
  • Consider using credit-building products or services.

Ultimately, having a strong business credit score can bring down your interest rate and give you more favorable terms for borrowing. 

2) Improve Cash Flow

Look at your inventory with fresh eyes to see what you can do to improve cash flow. 

Begin by: 

  • Analyzing and optimizing billing and collections processes. 
  • Managing expenses and negotiating better terms with suppliers.
  • Diversifying revenue streams to stabilize income.
  • Managing inventory and selling what you have in stock. 

Remember that, to a lender, cash is more important than profit, as it’s what allows you to repay the loan. 

3) Reduce Existing Debts

If you have a lot of debt, tackle the high-interest debts first.

Devise a plan, consider consolidating debts to lower payments (focus on lowering payments, not interest rates), and avoid taking on new unnecessary debts.

Doing all this will improve your debt-to-income ratio and enhance your business’s financial stability. 

4) Enhance Your Business Plan and Projections

As your business and the market evolve, a business plan is never complete.

Make time to update yours in light of the current market conditions and your evolving business goals. The more accurate your financial projections are, the better a lender can evaluate your business.

Be sure to develop clear, realistic financial projections with contingency plans, and seek feedback on your plan from mentors or industry experts.

5) Explore Alternative Funding Options

If you were denied a traditional small business loan from a bank or lending institution, don’t be dismayed—there are funding options better suited for your business.

Not every business has the ability to meet the strict lending requirements of traditional banks. Alternative financing options are any option outside of a traditional bank. 

For example, peer-to-peer (P2P) lending is a type of social lending where investors or groups of individuals are matched with entrepreneurs looking to grow. You can also look into business grants, friends and family, personal loans, or crowdfunding options. 

An Alternative Option: Revenue-Based Financing

If your business is making frequent sales but still can’t secure traditional funding, it may be time to consider revenue-based financing, sometimes known as a merchant cash advance (MCA)

This is a flexible, simple way to get fast funding based on your future sales. Because it is tied to your business’ success and it’s not a business loan, the requirements for eligibility are less stringent.

Instead, your business receives a lump-sum payment in exchange for a portion of future sales. The funder will collect a percentage of either your weekly or monthly sales, through all your revenue streams (including credit cards, checks, wires, cash, and ACHs). 

Revenue-based financing can be a great option for small businesses without impeccable credit and those who lack collateral—selling is all it takes to receive the cash.

Through revenue-based financing, your business will also gain credibility with future potential lenders, as you’ll have a more robust business history. 

With a responsible financing partner like Nexi, you could cash in up to $500,000 and be approved within 24 hours. 

Don’t Let a Small Business Loan Denial Hold You Back 

If your small business loan is denied, don’t despair.

Instead, take the time to walk through these actionable steps and learn as much as you can about the operations of your business. Put your findings on paper and get them working to improve your business’ financial standing.

If you’re searching for flexible funding options, check out revenue-based financing options from Nexi. We’re not your average lender—we are here to partner with small businesses like yours to help you discover success. 

Apply today or contact us to learn more. 

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