Small business loan denied? Here’s what to do next

If you applied for a business loan but were denied, you’re not alone. According to the 2024 Report on Employer Firms, 22 percent of employer firms were denied business loans in the past 12 months. Another 28 percent were only partially approved. With lending standards continuing to tighten, the number of denials or partial approvals could increase in the near term.

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

1. Find out why your business loan was denied

If you are denied a business loan, your first step should be to learn why. 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.

Once you know the reason why, see if there are any steps you need to take to improve your chances the next time. If the reason for the loan denial is something you can’t change immediately, you can look for lenders that will take your business in its current state. Every lender sets requirements for credit score, time in business and revenue. You can find lenders with relaxed requirements to improve your odds of approval.

• Common reasons for loan denial

  • Too much debt
  • Bad credit history
  • You don’t meet the lender’s eligibility requirements
  • Not enough collateral
  • Not enough free capital or cash flow
  • Don’t have a business checking account
  • High-risk industry
  • Don’t have a business plan

Too much debt

If your business carries a significant amount of debt, it may hinder your ability to repay a new loan. Lenders view excessive debt as a risk because it can lead to default. And if you default on a business loan, a few things may happen, including the lender seizing business or personal property to recover the borrowed funds.

What to do: If you’re denied because of too much debt, you can either show the lender that you have more income or offer collateral.

You can also pay off debt to lower your overall debt responsibilities, called your debt load. You can do this by renegotiating terms with creditors, consolidating loans or making additional payments. Consider limiting the use of your available credit, which adds to your debt and impacts your ability to build business credit.

Another option is to apply with multiple lenders to see if one will approve your current debt load. But use a business loan calculator to estimate payments to confirm any additional payments will fit in your business budget.

Bankrate tip

You can apply these ratios to see how much debt your business can handle:

 

• Debt-to-income ratio: A measure of how much debt you have compared to business revenue. A DTI of 36 percent is considered healthy, but some lenders will approve higher.
• Debt service coverage ratio: DSCR calculates how much operating revenue you have divided by your debt payments. Most lenders want to see a DSCR of 1.25 or higher.

Bad credit

A business owner with bad credit is a red flag for lenders. It suggests that you may struggle to manage your finances, and many lenders don’t want the risk of lending to a bad credit borrower.

When comparing business loans, note the minimum credit score the lender accepts. Banks and credit unions typically prefer strong personal credit scores of 670 or higher. Online lenders usually have more relaxed 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. For example, if you have a history of late or missed payments, consider setting up autopay so bills are paid on time. You can also review your credit report to dispute errors and inaccuracies.

Since building a positive credit history can take time, you may want to look for lenders that specialize in business loans for bad credit if you need funding fast.

Don’t meet the lender’s eligibility requirements

Failing to meet a lender’s eligibility requirements for a business loan can result in denial. All lenders have specific criteria related to credit scores, annual revenue, time in business and other factors.

What to do: It’s important to review the eligibility requirements of potential lenders before applying. If you don’t meet the lender’s criteria, consider alternative lenders that set more relaxed eligibility requirements. For example, you may find an online lender that offers loans to startups, businesses with bad credit or businesses with low revenue.

Not enough collateral

With a secured small business loan, businesses must pledge assets as collateral that can be seized if they default on the loan. The collateral is used as a way to repay the loan if the business can no longer make payments. But the lender may deny your application if the value of your assets doesn’t cover a significant portion of the loan.

What to do: If your business loan is denied because you don’t have enough collateral, you can turn to unsecured loans, short-term loans or loans that rely on your future income instead of collateral. Options include:

• Unsecured business loans
• Merchant cash advance
• Invoice financing
• Invoice factoring
• Purchase order financing

Not enough free capital or cash flow

Lenders want to see that your business has sufficient cash flow to repay the loan alongside other business expenses. Lenders may deny a business loan if your level of revenue doesn’t support this. Lenders typically set the minimum amount of revenue they require between $100,000 and $250,000.

What to do: You can complete a cash flow analysis to figure out ways to better manage your expenses and free up cash so you can afford a loan’s repayments.

The exact amount of cash flow that lenders consider reasonable is subjective. To get approved with low revenue, search for lenders that have more lenient requirements. While some lenders, like banks, keep strict requirements, such as $250,000, other lenders, like online or alternative lenders, will be more flexible. This is especially true if you are only looking for a business loan of $100,000 or less.

Don’t have a business checking account

A business checking account is a valuable tool that can help you manage your business finances more effectively. While it isn’t a requirement to start or run a business, many lenders, including OnDeck, Bank of America and Fundbox won’t approve loan applications for businesses without business checking accounts.

What to do: To meet this requirement, simply open a business checking account. If your lender offers a full suite of business banking products and services, consider opening an account to establish a relationship. Lenders may be more willing to approve you if you already have an existing relationship with the same bank.

Industry risk

Some lenders don’t want to risk lending to businesses in certain industries due to the odds of failure or unstable revenue. For example, restaurants and real estate businesses may be disqualified from a small business loan. Most lenders will list the excluded industries on their websites or in the fine print of the application.

What to do: Research lenders who are familiar with your industry and the associated risks. If you’re unsure whether your industry qualifies, you can contact the lender’s customer service.

Many alternative lenders don’t have the same industry restrictions as traditional lenders. But they often come at a high price due to higher interest and fees.

Don’t have a business plan

Not all lenders require a business plan, but the ones that do want to see a clear and detailed outline of how you’ll use the loan, how it will benefit your business and if your business has the potential to earn the revenue necessary to repay the loan.

If you did submit a business plan and were denied the loan, the lender may consider your strategy for growth weak. 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 your business’s ability to grow based on the sources of revenue you expect to bring in.

What to do: If you submitted your loan application without a business plan, consider reapplying with a strong business plan to prove your business’s ability to repay the loan.

If you submitted a business plan and were denied because of it, talk with the loan specialist about the aspects of the plan that led to the business loan denial. You can make changes in your business’s growth strategies before reapplying for the loan.

2. Consider applying again

When it comes to getting approved for a business loan, persistence is key. Consider reapplying when you’ve addressed any lender concerns. If you were denied an SBA loan, you’ll need to wait 90 days before reapplying.

Make sure to improve the area of your business that led to the loan denial in the first place. For example, submit a detailed business plan that shows how your business plans to grow and repay the loan. Your improved application may help the lender choose to fully or partially approve your loan this time around.

3. Consider alternative lenders

If you don’t think you’ll get approved with the same lender, consider applying with alternative lenders. Alternative lenders are those that offer business loans to subprime borrowers or lenders that offer alternative types of loans. Explore all the alternative lending options to find one that will approve your business for a loan.

For example, conventional business lenders tend to offer term loans, equipment loans and lines of credit. Alternative lenders may offer merchant cash advances, invoice factoring and asset-based financing.

Alternative lenders may also offer the same types of loans as traditional lenders but with relaxed eligibility requirements. For example, they may accept startups with six months in business or personal credit scores in the 600s.

Alternative lenders to consider:

Bankrate insight

Online lenders typically offer a variety of unsecured business loans, including business lines of credit and merchant cash advances. Loan amounts will likely be significantly lower than secured business loan amounts. If you don’t have a high credit score and strong business financials, you may see loan amounts of $100,000 or less.

Bottom line

Poor credit, insufficient cash flow, lack of a business plan and other issues can prevent you from securing a small business loan. It can be disappointing when you get denied a business loan, but a denial doesn’t mean it’s the end of the road. You can understand the reasons for getting denied and take the opportunity to improve your application.

Once you’ve addressed the problems, you may get approved more easily with the same or a different lender or type of loan. In some cases, you may need to improve your business’s credit or financial profile before applying for a new business loan. Once you’ve accomplished these steps, you’ll seem less risky to lenders and have better odds of approval.

Frequently asked questions

• What credit score do you need to get a business loan?

  Credit score requirements vary by lender, but you can secure a business loan with a score as low as 500.

• How hard is it to get a small business loan?

  Getting a small business loan can be hard if you don’t have a strong credit or financial profile. Getting approved depends on the loan type, lender, their requirements and your qualifications, including credit score and annual revenue. Start by looking for lenders with eligibility requirements that fit your business for a better chance of getting approved.

• What is a high-risk business loan?

  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 and businesses with bad credit or low revenue.