13/07/2024

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What to Do if Your Small Business Loan is Denied

What to Do if Your Small Business Loan is Denied

Key takeaways

  • There are several steps you can take after being denied a small business loan
  • Lenders look at a variety of criteria that could have led to your denial, like credit score, revenue and collateral
  • You can look to online lenders, which have relaxed eligibility requirements

If you applied for a business loan but were denied, you’re not alone. According to the 2023 Report on Nonemployer Firms, over a third of startups and established businesses without employees were denied business loans. Another one-third of startups with employees were also denied.

While unfortunate, having a business loan denied doesn’t mean you’ve run out of options. There may be different ways to find the financing you need. Let’s look at the best steps forward after getting denied a business loan.

If you are denied a business loan, your first step should be to learn why to see if there are any steps you need to take to improve your chances the next time you apply. You should receive a letter or notification that your loan was denied with the reasons why. If you need more insight, you can reach out to the lender to see if they will provide a better explanation.

If the reason for denial is an area that you can’t change, you can look for lenders that will take your business in its current state. Every lender sets requirements in a few major areas that businesses must meet to be considered: credit score, time in business and revenue. You can find lenders with relaxed requirements to boost your chances of getting approved.

  • Here’s a look at common factors that could disqualify you from getting a business loan with certain lenders:

    • Poor credit or payment history
    • Not enough revenue
    • Falls on the list of ineligible industries
    • Not enough collateral to guarantee the loan
    • Lack of time in market
    • Too much debt
    • Funding request is too high
    • Weak business plan

Let’s walk through the different reasons you may have your business loan denied and what you can do about it.

Lenders outline how high a credit score you need to be eligible. They often publish their requirements based on your personal credit score, though they may also look at your business credit. Some lenders like banks and credit unions prefer strong personal credit scores of around 670 or higher. Online lenders typically have more relaxed eligibility requirements. Some may allow business owners with credit scores as low as 500.

What to do: Taking the time to build your credit can make it easier to qualify for affordable financing with flexible repayment terms. But if you can’t wait, look for lenders that specialize in business loans for bad credit.

Having plenty of revenue — and a steady flow of it — are top priorities when applying for a business loan. Lenders want to ensure you can handle business loan payments alongside other business expenses.

Lenders may deny a business loan if your level of revenue doesn’t support being reasonably able to repay the loan. Lenders typically set the minimum amount of revenue somewhere between $100,000 or $250,000.

What to do: The exact amount that lenders consider reasonable is subjective. To get approved with low revenue, you can find lenders that drop revenue requirements lower than usual. While some lenders like banks keep strict requirements, such as $250,000, other lenders will be more lenient. This is especially true if you are only looking for a business loan of $100,000 or less.

Bankrate insight

Most lenders will want to see proof of your business’s revenue. They may ask to see copies of your business bank statements as well as past tax returns and profit and loss statements. Some may even require you to have a business bank account in order to qualify.

Going hand in hand with having enough revenue, a lender will look at how much business debt you have. The lender may check your business finances as a whole. It may also use several calculations to determine whether you can manage repayments.

What to do: If you’re denied because of too much debt, you can either show the lender that you have more income or collateral. Or you can pay off some debts or loans to lower your overall debt responsibilities, also called your debt load.

Two ratios a lender may use include:

  • Debt-to-income (DTI) ratio. DTI is a measure of how much debt you have compared to business revenue. It calculates your debt as a percentage of your revenue, such as 30%. In consumer lending, a 36% DTI is considered healthy, though commercial lenders may approve you with a DTI as high as 50%.
  • Debt service coverage ratio (DSCR). The DSCR is also a measure of how debt relates to your operating income. It calculates how much operating revenue you have divided by your debt payments. Most lenders like to see at least a 1.25 DSCR or higher.

Bankrate insight

To make sure you’re ready to be approved in the future for a small business loan, you can do a cash flow analysis, examining your business’s income and expenses. You can apply the DTI and DSCR to see how much debt your business can handle.

The amount of time your business has been in the market proves that your business’s finances are stable and its products serve a customer need. Most traditional lenders are looking for at least two to three years of experience, while online lenders may accept six months to one year.

What to do: If you’re looking to get approved for startup funding, check with the bank where you do your business banking. In some cases, the bank will be more willing to work with a customer with an already established relationship.

You can also offer a sizable down payment or collateral. For example, you might pique a lender’s interest if you have a 10 to 20 percent down payment, versus a lower 5 percent down. You can also look for lenders specializing in startup loans. These will offer you the most flexible terms and loan amounts compared to traditional banks.

SBA loans for startups

SBA loans are term loans and lines of credit granted through a program by the U.S. Small Business Administration. The SBA guarantees part of the loan for the bank, giving small businesses a better chance of getting approved. Lenders are allowed to set their own lending criteria, and they often edge out brand-new startups.

But startup SBA lending is available through lenders that focus on SBA startup loans. According to the 2023 SBA weekly lending report, 21,864 SBA 7(a) loans have been approved for startups.

Nearly 47 percent of those were startups using the funds to open their business. SBA startups loans can also be used to boost your startup from its baby stages to a more stable, mature business.

SBA loans go through bank approval as well as SBA approval, so the process can take longer than conventional business loans usually do. You can expect to wait 30 to 90 days to get funding.

Lenders want to see that you have an investment in your business, showing that you take financial responsibility for it. The lender may require a down payment of at least 5 percent or collateral, which is a business or personal asset used to guarantee that you can repay the loan.

Lenders may require collateral for many types of secured business loans, such as a business term loan or line of credit. Equipment loans are also designed to be secured by the equipment you’re already buying. Equipment loans are one of the easiest loans to find financing without a down payment.

What to do: If you get denied because you don’t have enough collateral or cash on hand, you can turn to alternative loans. These loans rely on your future income, which isn’t considered collateral in the business lending world:

Bankrate insight

Unsecured business credit cards can also act as a loan without a collateral required to back the amounts you borrow. Credit cards allow you to pay expenses as they arise and make payments either by paying in full or meeting the minimum payment. You also don’t have to pay interest if you always pay off the full balance each month.

Another reason you may have been turned down by your lender is that you have a weak business plan. Not only do lenders want to see a sturdy business currently, but they may ask for your plans and revenue projections for the future.

The lender may want to see a product idea or business model that meets a significant customer demand or fills a hole in the market. Or they may gauge the ability of your business to grow based on the sources of revenue you expect to bring in.

What to do: If you submitted a business plan and were denied a business loan, talk with the loan specialist about the aspects of the plan that led to a denied loan. You can change those aspects and make changes in your business’s day-to-day before reapplying for the loan.

If you don’t have a business plan, consider writing a strong business plan to put your best foot forward with new loan applications. If you need help, organizations like SCORE, the SBA and Small Business Development Centers provide resources to help you with your business plan.

Sometimes, getting approved for a small business loan isn’t possible. Even then, you don’t need to lose hope on financing your business. You may be able to bootstrap your business, which means using available resources like savings or taking on side hustles to get your business up and running. You may also want to consider the following options:

SBA loans

SBA loans are designed to help businesses who can’t qualify through traditional sources. There are several types of SBA loans available to help different types of business owners, including startups, business owners with bad credit and businesses in underserved communities.

Personal loans

Some small business owners may have to turn to personal loans to finance a business. Fortunately, many personal loans can be used for just about any purpose, including business expenses. But check with your lender to be sure.

Some lenders like Upstart offer personal loans that may be easier to qualify for compared to business loans. But make sure to look for a business loan first since the interest you pay on business loans can be tax deductible, unlike interest paid on personal loans.

Peer-to-peer lending

Peer-to-peer lending is an alternative to a business loan in which you borrow money from individual people. You can find people willing to lend to you on peer-to-peer or crowdfunding platforms like Kickstarter or Honeycomb Credit.

These platforms may let you borrow money with similar interest rates and repayment terms as normal business loans. Other platforms like Kiva don’t charge interest for the money you borrow.

Friends and family

Borrowing money from friends and family to use for a business is more common than you might think. According to the 2023 Report on Nonemployer Firms, 25 percent of startups with no employees received some funding this way over the last five years. Another 38 percent of startups with employees borrowed from friends and family.

Another way to use support from your inner circle is to get a friend or family member to sign as a cosigner for a loan. The person essentially takes on the responsibility of paying the loan for you if your business can’t repay.

While having a cosigner can help you get approved for a loan, it’s tough to ask someone to take on that level of responsibility. According to a Bankrate survey on lending money, some 25 percent of people surveyed lost money due to lending or cosigning for a friend or family member. Another 17 percent damaged their relationship because of the finances at stake. Be cautious if you plan to use friends or family to finance your business idea.

Venture capital

You can also look for venture capital funds, which is geared toward financing startups through a pool of investors. Venture capital may be offered through investment businesses like J.P. Morgan. Venture capitalists typically look for startups with high potential to grow.

You’re more likely to get accepted if you have a unique business idea that you can’t find on the market or a business angle that fills a market gap. Venture capital requires you to give a portion of your business to investors, meaning you have less control over what happens with your business.

You also have the added pressure of business performance in order to keep your investors happy and invested in your business for the long term.

Bottom line

It’s possible to get approved for a small business loan even after you’re denied. Make sure you’re comparing the right types of business loans that fit your needs. Then compare lenders to get the best loan offer possible with your business’s current financial status.

  • You can get denied for a business loan for a variety of reasons. The lender might consider you ineligible based on your business’s time and experience in your industry. You might also not have solid revenue or credit to reassure the lender that you can repay the loan. Finally, if the lender considers you a high risk, they may want to see collateral or cash on hand to prove that you can manage the loan.

  • Yes, you can apply again for the SBA loan after 90 days. Since the SBA loan approval process takes time, consider getting all the paperwork in order ahead of time. You may also want to talk with the lender to see why the SBA loan was denied. Then, you can avoid making the same mistakes with your loan application again.
  • A high-risk business loan is a business loan granted to a business considered high-risk for the lender. Your business may be considered high risk if you don’t have stable finances to prove that you can pay back the loan. Businesses typically considered high-risk are startups, bad credit businesses or businesses with low revenue.