Any entrepreneur will tell you there’s no guarantee you’ll get the business loan you want. In fact, many don’t.
According to the Federal Reserve’s latest Small Business Credit Survey, just 42% of small business applicants received the full amount of financing they sought, meaning almost 6 in 10 owners got less than they needed or nothing at all. What’s more, 22% received none of the financing they applied for, even though many run real businesses with real, and often robust, revenue.
What’s behind so many denials? It’s worth a close look, with these factors (and some robust solutions) at the top of the list.
“A denial should be treated like a diagnosis,” Michael Garcia, AVP of Corporate Sales at America’s Christian Credit Union, told SBG. “Once you understand the actual reason for the decline, the timeline typically becomes clear.”
Here’s what to do after receiving a business loan rejection, for the short and long term.
1. Ask the Lender Exactly Why You Were Denied
Getting answers from a lending officer isn’t always easy, but be persistent in reaching out after a loan rejection and ask why the loan was denied. “Do this before rushing off to apply to other lenders,” Joe Braier, President & CEO of Lake Country Advisors, an M&A advisory firm serving lower- to middle-market businesses, advised. “Once your queries are analyzed, analyze which area of the lending criteria was found wanting.”
That could mean a bevy of items, like insufficient cash flow, poor quality of financial records, excessive debt levels or, most commonly, excessive business risk. “Once you’ve identified what needs improvement, then you can begin to address those weaknesses and build a stronger case for obtaining additional funding,” Braier said.
2. Learn What Lenders Look for Beyond Your Credit Score
Getting denied a business loan is not all about a sour credit score, lending experts say. There’s way more to the process than that.
“Loan denials are typically based on much more than credit,” Braier told SBG. “When evaluating the ability to repay, lenders also review cash flow consistency, current obligations, industry health, and clarity as to why the business owner believes their company’s financial situation will support the requested funding.”
While many owners believe that high revenue equates to an approved loan request (it doesn’t), owners need to show the same level of profitability, financial record keeping, and/or trending cash flows. “All must support the amount of money being requested,” Braier said.
The Fed’s survey backs that up. Among applicants who didn’t get the full amount, the most common reasons lenders gave were:
- Lender requirements too strict (46%)
- Too much debt already (37%)
- Low credit score (30%)
- Insufficient collateral, weak sales, or lenders not approving businesses like theirs (29% each)
Lenders take a vastly different view of a business loan than an owner, and most of it has to do with one issue – risk.
“One of the big surprises for many business owners is the fact that profitability alone is not enough,” Chris Cornella, vice president of business development at US Professional Funding & US Medical Funding, told SBG. “The banks require proof of the ability to consistently generate sufficient cash flow to pay the existing debts plus the new loan. Another surprise is the fact that all banks have their own levels of risk.” (That cash-flow test is your debt service coverage ratio.)
Lenders are also sticklers about clean records and an organized application, and they do so for good reason.
“Some of the most common reasons that I see small business loan applications rejected is that the business just doesn’t have the financial stability, their financials are not done properly, they’re commingling funds,” Eric Pemper, managing member at CuraDebt, told SBG.
If a borrower’s paperwork is not crystal clear, any traditional lender would likely doubt the loan will be paid back, Pemper advised.
3. Fix the Weak Spot Before You Reapply
A quick review with a trusted lender will also reveal whether a simple mistake triggered a denial.
“If, for instance, the cause of denial is high credit utilization or a missed payment, improvement can happen relatively quickly, once those issues are addressed,” Mark Valentino, head of business banking at Citizens, told SBG. “More significant credit challenges may take longer.” (Here’s how to check your business credit score.)
After a denial, learn about the reason behind it. “A denial doesn’t necessarily mean the business isn’t viable; it often means there are specific areas that need to be strengthened first,” Valentino noted.
4. Build a Clear Plan for the Money
Once you’ve shaken off the loan rejection and taken the steps to figure out why, start preparing a new business loan process with some newfound clarity on what it takes to get the job done.
Here, the biggest mistake is showing up for a loan meetup before you’ve done the homework.
“Business owners know they need capital, but sometimes they haven’t clearly defined how much they need, what they’ll use it for, or how the financing will support growth,” Valentino said. “A lender wants to see a thoughtful plan. Owners don’t need a perfect business, but they should be prepared to discuss their finances, explain their strategy and demonstrate how the loan fits into the broader goals of the business.”
It’s also a good idea to ask a lender beforehand what unique areas of loan approval matter most. Many lenders actually appreciate the reach-out, figuring a more enlightened small business borrower stands a better chance of being a solid credit risk.
“Ask about the purpose of the loan and how you plan to repay it,” Valentino said. “The strongest applications show that the owner understands both where the business stands today and how the financing will help it move forward not just tomorrow but across a long timeline ahead.”
Overall, Valentino advises following this checklist before applying for your next loan:
- Clarify exactly how you’ll use the funds and prepare to articulate that plan. Research different types of loans before applying.
- Assess your finances (revenue, expenses, and debts) to determine how much you’ll borrow. This is a great way to pre-determine possible application weaknesses as well.
- Clean up your credit if needed.
- Ensure your business meets all legal and regulatory requirements.
- Identify which loan terms are feasible and prepare a repayment strategy you can present to lenders.
For more on preparing an application, see how to get approved for a business loan.
5. Reapply at the Right Time, with the Right Lender
It’s also important that a business owner not treat a denial as the end of the conversation.
“Again, your first step should be understanding why the application wasn’t approved,” Valentino added. “A business may be ready to reapply sooner if the issue (such as a late payment) has already been remedied. If the denial was tied to credit or cash flow, it often makes sense to spend time improving those areas before coming back.”
As Cornella noted, every lender has its own level of risk. A bank that turned you down for a low credit score isn’t the whole market: many non-bank lenders underwrite mainly on recent bank deposits and cash flow, so a business with steady revenue can qualify with a lower score. See what’s available with bad credit business loans.
Compare Your Options with SBG Funding
SBG Funding is a direct provider of revenue-based financing and a marketplace offering a broad range of funding solutions through an extensive network of lenders. We look at your business’s cash flow, not just your credit score, and applying doesn’t affect your credit score. If you need to cover a gap while you rebuild, working capital is sized to your revenue.
Get Started Today:
- Fill out our online application.
- Speak with a funding specialist to compare your offers.
- Submit your documents and receive funding quickly.
Typical Requirements:
- Four months of bank statements
- Minimum FICO score of 500, six months in business, and $150,000 in annual revenue
FAQs
The most common reasons are strict lender requirements, too much existing debt, a low credit score, not enough collateral and weak or uneven sales. Lenders also turn down applications with disorganized financials or a vague plan for the money. Ask the lender for the specific reason; it tells you what to fix.
It depends on the reason. A fixable issue, such as high credit card balances or a single late payment, can be resolved in weeks. Credit or cash flow problems usually take a few months of steady improvement before a new application is stronger.
The denial itself isn’t reported to the credit bureaus, but a lender’s hard credit inquiry can lower your personal score slightly. Applying with lenders that use a soft pull, as SBG Funding does, doesn’t affect your score.
