“No” can be a painful word, especially in the form of a small business loan denial.
There’s no sense in sugarcoating it.
You spent hours organizing information and perfecting your application. Then, you spent days (if not weeks) patiently waiting for approval, imagining all the exciting ways you’d invest your cash infusion.
Then, the bad news came: “business loan denied.”
If you read no further, we hope you remember these two hopeful facts:
- That solitary “no” was not a permanent denial—it was merely a detour to something even better.
- That wasn’t the only small business loan on the market—there are many more funding options to consider.
In this article, we’ll review the most common reasons for loan denial, reveal the short-term steps to take after your rejection, and discuss five powerful strategies for small business loan success.
Understanding Loan Denials: The Reasons for Rejection
Most people assume small business loans are easy to obtain.
Despite this reputation, recent statistics tell a different story—especially in the aftermath of the Coronavirus pandemic.
In 2019, for example, alternative and institutional lenders approved roughly 60% of applications. By March 2020, however, approval rates were nearly cut in half.
Before long, interest rates will be cut, the economy will improve, and you’ll gain fresh opportunities to acquire a loan. Until then, this is simply a very difficult season for entrepreneurs to obtain credit.
Especially, during this intensely reflective period, it’s wise to investigate the reasons your loan application was denied and adjust accordingly.
There’s just one problem: though the lender is required to reveal the exact reasons for rejection (per Federal law), they often provide generic responses unless pressed for details.
Therefore, we encourage you to contact your lender to receive specific feedback.
We will return to that topic in just a minute, but before that, let’s review the most common causes of loan application denial that entrepreneurs encounter.
Low Business Credit Score
Damaged credit is a leading cause of business loans being denied.
While a string of late payments is often to blame, there are several potential causes for a low business credit score. These include bankruptcy, default, multiple credit applications over a short time period, and a high credit utilization ratio.
While it’s easy to speculate about the causes of low credit, it’s best to request a copy of your business credit report to identify the underlying problems. After all, business credit score is just a three-digit derivation of your larger (and more complex) credit history.
Don’t forget to also review your personal credit history. Even though you apply for a business loan, many lenders review your personal financials to assess your overall credit risk. That’s especially true if you’re launching your first company and have little or no business credit.
Insufficient Cash Flow
“Can this business consistently make repayments?”
This is the main question lenders ask, and a cash flow statement often reveals the answer.
In other words, lenders are looking to see if your business has more capital coming in than it has going out.
If the opposite situation is true, they will likely deny your application.
Many traditional lenders require applicants to state their minimum annual revenue. While the exact number varies, it generally starts at $100,000.
If your business does not yet meet these requirements, don’t worry. There are several additional funding alternatives that we will discuss at the end of this article.
Weak (Or Nonexistent) Business Plan
To better understand your company, some lenders request a copy of your business plan.
This is often a sign that they’re interested in your company and want to learn more about your vision, products, and revenue model.
More than anything, however, lenders refer to your business plan to see exactly how their loan will be applied to your long-term goals.
The rules are clear: while a truly creative and compelling business plan attracts lenders,
a formulaic (or nonexistent) plan almost always dissuades them.
If you need help drafting or refining your business plan, check out our step-by-step guide.
Lack of Sufficient Collateral
Many lenders reduce their risk exposure by requiring borrowers to pledge assets (i.e., collateral).
Should the business default, the lender can exercise their legal right to “seize” those assets and cover the remaining balance of the loan.
Unfortunately, many emerging entrepreneurs lack the collateral needed to satisfy these expectations. Or, in other cases, their assets are already committed elsewhere and cannot be pledged to secure the requested loan.
As a result, lenders reflexively deny loan applications that lack “acceptable” collateral, such as paid-off cars, investment accounts, and savings deposits.
That’s why unsecured loans—or credit products that don’t require collateral—can be a compelling option.
Industry Risks
As we’ve discussed, it’s a very challenging time for any business to receive a loan.
However, some industries are perceived as especially “high-risk” by lenders, many of whom institute additional roadblocks to approval.
For example, speculative businesses—like pawn shops or real estate investing firms—face difficulties obtaining loans. First-time farmers and agricultural start-ups must also contend with unique challenges.
And while sole proprietors often struggle to gain funding (along with restaurateurs), so do “gray area” businesses, like cannabis shops or gambling businesses.
Keep in mind that these are not fixed rules, and if you’re currently working within a risky industry, there are plenty of alternative funding routes available to you (more on that in a minute).
Short Business History
The longer you’ve been in business, the higher your chances of securing a loan.
Unfortunately, the opposite story is equally true.
That’s why startups face such a frustrating paradox: though they need a loan to launch the business, they haven’t been operating long enough to qualify for a loan.
Traditional banks have the most stringent requirements. In many cases, they expect at least two years of operations to get approved.
Fortunately, some online lenders are more flexible and require just six months in business to obtain funding.
Ultimately, it pays to research all available options and capitalize on the rise of convenient fintechs within the digital economy. Even if this is your first week as an entrepreneur, there are lenders out there who would be thrilled to work with you.
Incomplete (or Inaccurate) Application
Loan applications can be lengthy (and tedious).
While it’s tempting to expedite the process, a rushed application can lead to significant mistakes.
Amid the excitement, many entrepreneurs unwittingly provide incomplete or erroneous information that compromises their application and results in a callous “no.”
These mistakes could be as simple as a single typo, or as unfortunate as uploading an unedited draft of your business plan. While those peccadilloes might seem negligible, lenders have no patience for even the tiniest errors.
Details matter, so be sure to take your time throughout every step of the application process.
What Now? Three Immediate Steps After Denial
Rejection is always frustrating, and it’s important to process the setback of a denied business loan.
At the same time, it’s equally important to move forward with a clear plan of attack. As William Shakespeare aptly put it, “what’s past is prologue”—the future is at your fingertips.
After the shock of rejection subsides, take these three steps to reignite your funding focus.
1. Review the Denial Notification
What was the lender’s stated reason for loan application denial?
This is the most important question you can answer. After all, you need to identify the problems in order to fix them.
Hopefully, the lender articulated the reason(s) in their rejection letter, equipping you with actionable items to strengthen your financial profile.
In many cases, however, lenders merely provide a generic response to applicants. For example, they might say “loan application denied due to poor credit,” without identifying the specific issues that prompted their denial.
That’s why the next step is crucial.
2. Request Additional Feedback From the Lender
Though the lender rejected your application, they’re not your enemy.
In fact, they could actually become your greatest ally in just a matter of months.
When you speak with the lender one-on-one, they can explain exactly why your application was denied. In discussing their decision, they can identify key areas of improvement for your small business to obtain funding.
This advice is both freely given and objective, which is quite valuable in a frequently opaque business world.
By speaking with the lender, you’ll slowly develop a trusted relationship with them.
Though they denied your most recent application, they might approve the next one down the line. After all, they want to do business with you—after your business financials are in order, of course.
So play the long game, heed their advice, and win a new “fan” of your small business.
One note: be as respectful and patient as possible with the lender. Their office likely deals with irate and demanding customers, so your patience will be much appreciated as they provide the feedback you need.
3. Analyze Your Business Plan and Financials
After the lender has articulated the reason(s) for denial, it’s time to conduct an internal review.
Maybe the lender revealed areas for improvement you hadn’t considered. Or, maybe they exposed vulnerabilities you already knew about but were scared to address.
In either case, now is the ideal moment to conduct a thorough review of your financial health.
Take time to review your business plan and investigate your income statement, cash flow statement, balance sheet, and credit report.
Then, compare your learnings to the shortcomings your lender identified. Are you fully on the same page? Partially? Not at all?
Be rigorous in your attention to detail, ask questions, and dig for the answers.
Above all, remember that this adjustment period is laying the groundwork for your next loan application. The hard work will pay off.
Preparing for Future Success
You understand your business better than anyone.
While you know what it takes to succeed, consider the following tips to help prepare for the future.
1. Strengthen Business Credit
Building business credit is vital.
That’s why we talk about it all the time.
After all, wherever you are in your credit journey, there’s always room for improvement.
To help strengthen your business (and personal) credit, be sure to:
- Pay your bills on time—and in full—every month.
- Keep your credit utilization ratio below 30%.
- Regularly review all of your credit reports.
You don’t need to be debt-free to get approved for a loan. You just need to demonstrate that you can handle your debts and make timely payments.
Want to go further? Consider a secured SMB credit card to build business credit.
2. Improve Cash Flow
At first glance, recommending improved cash flow sounds a bit like being told “Just do better! Sell more!”
But that’s not quite what we mean.
Instead, we’re simply proposing potential ways to free up floating capital. Beyond standard-issue price increases, you might consider:
- Prioritizing cash over credit as the preferred payment method.
- Optimizing your billing and collections processes.
- Improving inventory management (and offloading dead stock).
- Compelling customers to expedite invoice payments.
- Promoting sales with more appealing discounts.
- Negotiating more favorable terms with your suppliers.
Ultimately, enhanced cash flow could do more than help you qualify for a loan. It could be a total game-changer for the way you manage your small business.
3. Reduce Existing Debts
More cash flow is always a good thing.
But imagine having more cash flow and reduced debt. That’s a winning combination that improves solvency and longevity all at once.
To the extent that you can, aim to do the following:
- Tackle high-interest debts first (with the debt avalanche method).
- Revise your spending plan.
- Limit new debt responsibilities.
Looking to make your outstanding debts more manageable?
Small business debt consolidation could help you streamline the repayment process and save money along the way. Check out our SMB debt consolidation guide to learn more.
4. Enhance Business Plan and Projections
In the wake of your small business loan denial, you have a rare opportunity to go back to the drawing board.
In other words, you can turn your old business plan into a fresh and captivating story that no lender can deny.
Yes, it’s certainly important to set achievable projections and provide a concise market analysis in the details of your documents.
While the numbers matter, it’s far more meaningful to dramatize your goals, humanize your key employees, and encapsulate your company in a dynamic executive summary.
At their best, great business plans aren’t just dry old documents. They’re inspiring testaments to your diligence and imagination.
Check out our business plan guide (with downloadable templates).
5. Pursue Alternative Funding Options
As a small business owner, you have many funding options available to you.
On the one hand, there are more loan providers to consider than ever before. Beyond traditional banks, credit unions, and accessible SBA loans, the market of online lenders and fintechs is growing by the day.
With a bit of research, you’ll be able to find lenders that want to support your small business. Better yet, you’ll find lenders that can disburse funds in 24 hours or less.
Nevertheless, small business loans aren’t the only funding routes you can follow. In fact, there are five other pathways for your SMB to pursue:
- Business line of credit, which offers fast access to funding (whenever you need it).
- Community development financial institutions (CDFIs), which prioritize character-based lending to help underserved entrepreneurs access broader funding.
- Small business grants, which provide free money to qualifying entrepreneurs.
- Merchant cash advance, which delivers a lump sum of cash within 1-3 days (and with no collateral requirements).
- Small business credit card, which unlocks access to revolving credit (with amazing perks and cashback, exclusively for entrepreneurs).
As you can see, there’s no shortage of opportunities for you and your business.
uLink Business: Where Resilience Is Rewarded
While entrepreneurs like you have many skills, one talent reigns supreme.
You’re great at viewing a “no” as a “not yet.” And as you know, that “not yet” is an eventual and inescapable “yes.”
While the economy has suffered, there’s hope on the horizon. As interest rates are expected to be cut several times in 2024, more entrepreneurs will gain momentum and get the funding access they need.
In the meantime, uLinkbusiness is here to help you make international B2B payments as seamless as possible.
Pay invoices and suppliers for purchases from countries abroad, process international payroll, buy inventory, pay international service providers, and much more.
Want to learn more? Reach out to get started.
