Business Loan Application Denied? Here Are 3 Things to Do Next.
Getting your business loan application denied can take the wind out of your sails if you’re trying to start or grow a business — but it doesn’t have to. Not receiving a traditional loan in the timeline you imagined isn’t a dead end, it might just mean you need to improve the credit score. There are still funding options you can pursue even if you have blemishes in your credit history. Here’s are 3 things to do when the bank has denied your business loan application.
1. Review why you’ve been turned down
A small business loan and a personal loan are not the same financial products, so don’t assume that what you might have learned about personal finance in the past is totally transferrable. There are many common reasons for business loan denial. Ask your banker about the red flags that stood out in your application so that you can possibly fix any weaknesses and reapply or try applying for a new loan with a different lender.
2. Revise your application
If you’ve been denied for a small business loan but feel there are adjustments you can make to your application to reapply, gather the right materials to represent you in the best light for the next time you apply. Here are some actions you might need to take:
- Improve your business credit: First, get a copy of your business credit report so you can ensure it’s accurate. Then, determine if you need to engage in some common credit building techniques such as improving your debt-to-income ratio or credit utilization to have good credit. Also, make sure you establish a file at the the three business credit reporting agencies for business. Corporate credit bureaus are not identical to personal credit bureaus. Credit reporting agencies that are businesses are: Dun & Bradstreet, Experian and Equifax.
- Strengthen your cash flow: Creditors will look at your cash flow to help determine the financial health of your company. You might need to look at collecting late payments from outstanding invoices, reducing expenses and increasing revenues to improve in this area. A potential lender will want to know you have the cash position to meet your current liabilities and any future debt you might take on — cash flow is strong indicator of this.
- Find more valuable collateral: Ask your banker if increasing the value of your collateral would help the lender feel more secure about lending your the funds.
3. Research alternative funding options
There could be other ways to get more cash for your business, so you don’t necessarily have to rely on your traditional loan amount coming through to get the money you need. How quickly you need the funds and how much money you need will help determine what’s best for you. Here are some options you can begin to pursue.
Business credit card
How much money do you need to get your business to the next stage? If you can get approved for a high enough credit limit on a business credit card, this could be the best option for you.
Finding a business credit card with an introductory rate of 0% APR would mean you wouldn’t owe any interest until the introductory rate expired. If you’re able to pay off the card in this time frame you wouldn’t have to pay any interest at all on the money — possibly making this the cheapest way to find funds for your business.
Be careful, if you don’t pay the total balance before the introductory rate expires you could see a significant interest rate hike. This could mean that your business could be saddled with additional credit card debt.
Some online lenders are more flexible about how they lend money and can work with your current situation, which is advantageous if you need money now and can’t wait long term to improve your business credit or financials. As a small business, you might qualify for a federally regulated SBA Loan. You could be funded within 30 days and could receive between $5,000 and $5 million.
You could also apply for a short term loan online. These are typically given for a term of three to 18 months and amounts range between $2,500 to $250,000. If you only need a small amount of money to get your business to the next step, a short term loan might be best — there’s no point borrowing more money than you need. With a loan like this you’d make a set monthly payment until the loan was completely repaid.
Line of credit
If you need funds within the next 48 hours, a line of credit for your business could be the way to go. With a line of credit, your business gets approved for a maximum amount of funds. You draw from these funds as you need the money and you only pay interest on what you use. Business lines of credit are typically between $10,000 and $1 million.
A line of credit might also help build your business credit profile to make other methods of borrowing easier in the future. There’s no monthly payment with a line of credit, it’s what’s known as revolving debt.
If you’re planning to use your money to purchase new equipment for your small business, equipment financing might be a viable option for you. With equipment financing, a business receives a loan to buy business equipment such as computers, machinery, or any equipment you need to run your business. You use this new equipment as collateral for your loan, similar to the concept of a personal auto loan. If you stop making loan payments, the lender would be able to repossess the equipment to cover their cost.
Try this equipment value calculator to get an idea of what your equipment would be valued at.
Merchant cash advance
A merchant cash advance is a form of financing where lenders have more relaxed standards than a traditional small business loan. The approval for a merchant cash advance typically takes a few days. With this form of financing, you’d receive a lump sum which you’d then repay out of future credit, debit card sales, or other business receipts, usually in small daily or weekly payments. It’s popular with retail businesses or restaurants, industries that typically have many small credit or debit sales daily.
You’d need to provide your credit card processing statements to the lender to give them an idea of how reasonable it is that you’d be able to repay the advance. While there are no fixed terms, the merchant funding company will review your financial history to estimate when the advance will be paid back. Note that this will only be an estimate, and your payback could be faster or slower depending on your business’s performance.
Watch out, even though this financing could come in handy when you need it, the cost of capital can be expensive for merchant cash advances. There is no APR or interest rate on merchant cash advance deals. To help evaluate total costs associated with a merchant cash advance you should understand that a deal may have an “equivalent” approximate APR as high as between 40% and 350%. It can be one of the most expensive forms of business financing if you are not working with a reputable financing provider.