It doesn’t matter how much the business financing industry has evolved or how many options there are today. Getting a small business bank loan declined is a huge, huge blow.
You’ve probably spent the past few months gathering paperwork, meeting with your accountant, and composing an expansive business plan only to find out all this work was for nothing. Banks carry the cheapest and most convenient small business loans on the market, and you apparently are not worthy of them.
But the journey is not over. Some would say it’s just getting started.
Guide to Borrowing After Declined Small Business Loans
In this guide, we review the next steps to take after your bank loan gets declined. This includes traditional business term loans, SBA loans, or any business funding programs offered by a commercial bank. You’ll soon discover that this rejection does not mean you won’t qualify for another highly affordable small business loan from another business lender.
Step 1: Why Was I Declined for a Small Business Loan?
As crazy as this sounds, banks are not obligated to tell applicants exactly why they were rejected. Maybe your cash flow doesn’t meet their requirements. Or maybe you were declined for a business loan with bad credit. It’s your responsibility to ask the bank to provide an explanation.
Explore Your Credit Score
In most cases, small business bank loans get declined due to issues related to personal credit score, capitalization, or cash flow. Applicants who get approvals usually offer flawless credit scores and more than enough money in the bank to cover their desired expense(s) on their own.
You may have heard that banks only approve applicants who don’t actually need the money, and this is basically true. If you don’t have enough money saved up to cover your desired investment while running your business simultaneously for the duration of the loan, your chances of approval are may be slim.
It Could Be Cash Flow
As for cash flow, banks obviously want it to be consistent while showing signs of improvement. Banks don’t like to see dips in revenue, moderate to severe seasonality, or industry-wide downturns.
You could even say that “cash flow” is just another term for “industry,” since banks prefer industries that are on the rise, poised for massive growth or “recession-proof.” Examples include alcohol (bars, liquor stores), real estate (broker agencies, management firms) and fitness centers (gyms, boutique studios).
Focus on Financial Projections
A bright future makes your financial projections seem more plausible, as opposed to the unpredictability of a stagnating or relatively new industry. If you lean more towards the latter group, the only banks that may approve you likely worked with numerous businesses similar to your own.
Another possible factor in getting your small business loan declined is your “skin in the game.” This refers to the amount of your own money that you invested in your business. Banks tend to believe that business owners who put their own money on the line are less likely to let their businesses fail.
Step 2: Decide Whether You Should Explore Other Options
Once you identify why your business loan was declined, you face two options.
Either explore other sources of small business loans or do whatever you can to increase your chances of approval for a bank loan.
The latter option is typically only reserved for businesses that would be completely fine if they didn’t receive the additional funds in the near future. If you fall into the other category, rest assured you are not alone. And no, the fact that you need money relatively soon does not mean you will automatically have to deal with inconvenient terms and crippling interest rates.
Here are a few other business lenders along with the programs they offer, the borrowing limit for each program, and their average funding time (AFT).
Term Loan (Up to $250,000) Business Line Of Credit (Up to $15,000) AFT (Up to 90 days).
Peer to Peer Lender
Technically, peer-to-peer lenders like Funding Circle, Lending Club, and Street Shares aren’t business lenders themselves. The money doesn’t come directly come from them. Instead, they act as a middleman between the borrower and individual investors or an institutional investor, like a hedge fund or investment bank.
Between these three options, you can get a Term Loan ($2,000 to $500,000), Business Line of Credit ($5,000 to $150,000), and Invoice/Accounts Receivable Factoring (90% of invoice), all of which will reach your bank account in anywhere from 1-14 days.
The most widely-praised online business lenders include Kabbage, OnDeck, Currency Capital, and BlueVine. Between these four options, you can get a Term Loan ($5,000 to $2M), Business Line of Credit ($2,000 to $250,000), and Invoice/Accounts Receivable Factoring (Up to $250,000), all of which carry an AFT of 24-48 hours.
PayPal Working Capital, which is basically a Merchant Cash Advance (up to 18% of annual sales, borrowing limit is $97,000), AFT (24 hours or less).
United Capital Source
Term Loan ($10k to $5m), SBA Loan ($50k to $10m), Business Line Of Credit ($1k to $250k), Merchant Cash Advance ($7,500 to $1m), Invoice/Accounts Receivable Factoring ($10k to $10m), Equipment Financing ($10k to $5m), Revenue Based Business Loan ($10k to $5m), AFT (24-48 hours).
Step 3: Make Sure You Can Qualify
One thing all of these programs have in common is that they offer significantly more accessibility than traditional bank loans. They offer options when you get news of a declined small business loan. Here are the general requirements for the options listed above:
In order to borrow from a credit union, you must live, work, worship, or attend school in a specified area, or be a member of a group such as a school, labor union, or homeowners’ association. There are, however, numerous credit unions that anyone can join, usually by making a donation to a certain charity or joining an organization that is affiliated with the credit union.
As for general requirements, they aren’t much different than those of a traditional bank, though many do not require collateral. Applicants for small to mid-sized loans may also be able to fall slightly short on some requirements, mainly because credit unions are non-profit.
Peer to Peer Lender
At least one year in business, a minimum personal credit score of 600, and an annual revenue of at least $50,000. Other requirements, like personal guarantees and recent bankruptcies, are based on which lender you choose.
At least six months in business, 585+ credit score and $75,000+ in annual revenue for a Term Loan. For a business line of credit, a minimum credit score is not required but you must be in business for at least a year and earn at least $50,000 in annual revenue. Invoice/Accounts Receivable Factoring requires a credit score of 530+, at least 3 months in business, and $100,000+ in annual revenue.
As you can probably tell, this program is only available for PayPal users, specifically subscribers of PayPal Premier or PayPal Business for at least three months. In order to qualify, you must process at least $20,000 in annual sales for PayPal Premier or $15,000 in annual sales for PayPal Business.
United Capital Source
At least six months in business and $100,000 in annual revenue. Borrowers with low credit scores (around 500) can be approved for short term business loans, merchant cash advances, business lines of credit, accounts receivable factoring, and revenue-based business loans.
UCS’s SBA “Marketplace” Loan is available for borrowers with credit scores as low as 650, but you must be in business for at least 2 years, earn at least $1.2 million in annual revenue, and have no bankruptcies or foreclosures in the past three years.
Step 4: Examine Interest Rates And Terms
These business lenders offer the following programs, interest rates and terms:
Every credit union has it’s own interest rates and terms, but the interest rates are usually lower than commercial banks. A 2015 report found that the average 36-month Term Loan from a credit union had an interest rate of 9.39%.
Peer to Peer Lender
7.4% – 40%, 6 months to 5 years for most products.
Term Loan (Interest of 6% to 99%, 3 months – 5 years), Business Line of Credit (Interest of 15% to 99%, six months – twelve months), Invoice/Accounts Receivable Factoring (Interest of 15% to 68%, 1 week – 13 weeks).
Similar to a Merchant Cash Advance, the debt gets paid off via a percentage of daily sales that go towards the borrower’s PayPal account. The amount borrowed determines the percentage, based on your PayPal sales history. Once your loan gets approved, you choose from a series of daily repayment rates. But no matter which rate you select, the amount must be paid back in full within 18 months. There are no periodic interest charges, late fees, pre-payment fees, and penalty fees.
United Capital Source
MCA (Factor rates starting at 1.09%, 3 – 18 Months), SBA Loan (Interest of 5% and up, 3 – 25 years), Business Line Of Credit (Interest of 8% and up, up to 18 months), Term Loan (Rates starting at 9%, 3 – 10 years), Invoice/Accounts Receivables Factoring (Interest rates starting at 5.8%, Up to 24 Months), Revenue Based Business Loan (Rates starting at 9%, 3 – 10 years), Working Capital Loan (Rates starting at 9%, 3 months-10 years)
Step 5: Consider Other Factors Of Business Lenders
Now that you are aware of each business lender’s programs and requirements, it’s time to explore the other characteristics that will ultimately determine which business lender you choose to work with after a declined small business loan.
Start by asking yourself this question: Would you prefer a business lender that is more or less like a bank? Here are a few key characteristics to help you make this decision:
If you need money as soon as possible, your best options are online business lenders or alternative business financing companies like United Capital Source.
Many new borrowers receive funding just hours after filing their applications. Both options, however, require minimal documentation. So all that time you spent compiling paperwork for your bank loan would essentially be for nothing. The only business lenders that require anywhere near as much paperwork as banks are credit unions. They could make you wait at least a couple of months before funds reach your bank account.
Another potential disadvantage of online business lenders and companies like PayPal is the absence of person-to-person exchanges. You can’t negotiate terms with a computer algorithm, nor do you know exactly who to call (and when they’ll be available) if you have an important question.
Companies like United Capital Source, on the other hand, offer the services of living, breathing human beings. You can visit their offices or speak to whoever is in charge of your account on the phone. And since these companies compete with banks, they strive to trump the customer service of bank loan underwriters.
Rather than only being able to speak to someone during certain hours of certain days, companies like United Capital Source are willing to speak whenever it is convenient for their always-busy clientele.
Potential For Future Loans
If your rejection was related to an issue with cash flow, it’s probably because your industry is naturally prone to occasional dips in revenue. There’s virtually nothing you can do to make these fluctuations go away. What you can do, however, is partner up with a business lender that has worked with myriad businesses with similar challenges.
So, when choosing another business lender, consider the likelihood of your ability to access additional rounds of funding in the future. Do you need to prepare a ton of paperwork all over again? Could your small business loan get declined despite your strong repayment record? With some business lenders, paying off one substantial loan increases the likelihood of a second loan approval. And even quicker than the first.
Step 6: Improve Cash Flow
Regardless of what you choose to do after rejection, your final step remains the same. The chances of you being approved second time around and paying off the debt without trouble are infinitely greater if you take this time to improve cash flow.
There is always something more you can do to create a better balance between the money you spend and the money you take in. This could include cutting expenses, ramping up productivity, spreading brand awareness, or establishing new arrangements with key vendors.
As long as your cash flow is in good shape and you have the means to meet regular expenses, you should be able to be approved by at least one of the aforementioned business lenders. If you choose the right one, you might eventually thank the bank for rejecting you because it allowed you to meet your most important business partner to date.