These practical steps will help you get funding after a business loan rejection
Have you been denied a business loan? What you learn from being rejected the first time around can help you strengthen your application next time around.
In this article, we’ll go over three clear and practical steps to take after being denied to increase your odds of getting a business loan with your next application.
1. Ask why you were denied
It may sound simple, but it’s a must-do if you’re denied. You want to get clarity from the lender that denied your application to find out exactly why it turned you down. Most lenders are required to provide the reason, especially if they pulled your credit report. In some cases, you’ll get a formal letter that outlines the top reasons why you were denied.
Here are some reasons the lender may have turned you away:
- Low credit score
- Limited time in business (less than a year or two)
- Insufficient annual revenue
- High existing debt
- Missing documentation
Once you understand what kept you from getting a loan, you can address it. For example, if you learn that your revenue was too low, you can wait to apply until you have a few consistent months of revenue under your belt. If you’re carrying too much debt, your focus can be on paying it down.
If your lender doesn’t readily offer this information, try sending an email or making a phone call.
2. Fix what you can
Once you find out why the lender denied you, the work starts. Changes don’t have to be massive, and they likely won’t happen overnight. Small and consistent improvements make a big difference in your standing for future business loan applications.
Here are a few examples of where you might start, depending on why the lender turned you down:
- If your credit is the issue: Start by paying down any debts you may have, avoid new hard inquiries, and check your credit report for any errors. You might even look into tools that can help you build your credit, like Experian Boost or credit monitoring services that can help you track your progress.
- If you’re a startup and haven’t been in business long enough: Focus on building steady revenue and keeping excellent records. Even six months of consistent income can help strengthen your application. Plus, some lenders may be more lenient with time-in-business requirements.
- If you are missing documentation: Make sure you’re ready with key documents next time. For example, bank statements, profit/loss reports, tax returns, and a business plan should all be organized and easily accessible.
3. Explore more flexible lenders and loan types
The best tip by far: Explore other options. If a bank or traditional lender said no, chances are there are still lenders that may work with you. You have a long list of alternative lenders to consider:
- Online lenders: Lenders that operate primarily online tend to offer more flexibility regarding eligibility criteria. For example, some lenders may accept less time in business or offer business loans that cater to lower credit score borrowers compared to traditional banks. However, the trade-off is typically higher interest rates.
- Microlenders: These lenders provide smaller loans, generally up to $50K and may cater to newer businesses.
- Community Development Financial Institutions (CDFIs): These lenders support underserved and local businesses.
- Secured loan: Loans like equipment loans or working capital loans are backed by the equipment or invoices, which reduces the risk for the lender and increases your odds of qualifying.
- Business lines of credit: This type of loan gives you a set amount of funds you can draw from as needed. Some lenders may offer lines of credit to newer businesses or people with average credit, especially if your revenue is consistent. And, a business line of credit may work better than a term loan in some scenarios.
While applying, keep in mind that many lenders allow you to prequalify with a soft credit check. Prequalifying allows you to shop around without damaging your credit in the process and gives you an idea of what terms you may qualify for.
The bottom line
If you’ve been denied a business loan, don’t consider it a dead end. Start by finding out why you were denied and take steps to course-correct what you can. Plus, you can try casting a wider net by looking into alternative lenders.
