If you’re like most entrepreneurs, your business is your life. You draft a plan, research what you need to succeed, and put all the pieces in place to begin, ready to roll down the path to success. But then, you hit a major roadblock — you get rejected for a small business loan.
This can be shattering news when you first get it, but you shouldn’t be too discouraged. There are any number of reasons why you might get denied for your small business loan, and the good news is that you can usually find out what those reasons are and work on fixing what needs improvement. Additionally, there are alternatives to small business loans.
5 Steps to Take After Being Rejected for a Small Business Loan
If you’re ready to move past your initial rejection and be better positioned for a loan your second time around, take a look at these five steps. If you can work your way through all of them, you should greatly improve your chances for loan approval in the near future. Here are five things you can do after your small business loan application is rejected:
1. Ask the Lender Why They Rejected You
Lenders are in the risk-reward business. To help reduce risk on the loans they make, each lender institutes their own small business loan requirements and matches applications against them. If you didn’t qualify for a loan, there’s a specific reason why, and no one is in a better position to tell you than the lender.
Generally, if you’re rejected for any type of loan, whether it’s a business loan or a credit card application, you’ll typically get a notification in writing that details which factors contributed to your rejection. For example, the rejection letter might mention that you have too short of operating history or insufficient collateral.
Whatever the reason, understanding why your application was rejected is the critical information you’ll need if you want to be successful on your second go-around.
Read: How to Get a Business Loan
2. Check Your Personal and Business Credit Profiles
When you apply for a loan or a credit card, your personal credit score has a major effect on your loan approval or lack thereof, both for personal applications and some business applications. If you’re a sole proprietor, your personal credit score can also play a role in whether or not you can get a loan for your business.
If you get denied for a small business loan, your rejection letter might actually include your credit score. If it seems lower than you think it should be, you should get a copy of your credit report and make sure that it is accurate. Since each lender might pull your credit from a different credit reporting agency, it’s important that you check your report with all three personal credit bureaus — Experian, Equifax and TransUnion — to ensure they all have the correct information.
If you’re applying for credit in the name of your business, you might have a hard time getting approved for your first loan no matter how solid your personal credit report is. This is because a business has its own separate credit report, as it is a distinct legal entity. If you’re just starting a company, your business credit profile will likely be nonexistent, which can make it harder to get a small business loan. If you do have a business credit profile, make sure to check the data reported with all business credit bureaus, which are Equifax Small Business, Experian Business and Dun & Bradstreet.
3. Make Sure You Have All Your Documents Correct
Even if your financials are impeccable, if you don’t provide the proper documentation to a lender, you’ll get denied for your loan. If you’ve been rejected for a loan, one of the first things you should do is review the documentation you filed with your application for a small business loan. If everything is in order, dig deeper into the financial picture that your documentation portrays.
In addition to your credit score, the financials of your business play a big part in getting approved for a loan. Unfortunately, this can be a problem for many startup businesses, as even the Small Business Association (SBA) requires at least three years of financial statements before it will consider approving an SBA loan application. Other lenders want to see positive business factors like strong cash flow and rising earnings before they’ll consider extending a loan, which can be another challenge for new businesses.
If incomplete or missing documentation triggered your business loan rejection, ensure that all your paperwork is in order for your next loan application. If your loan was rejected because you don’t meet the financial standards of the lender, know that not all lenders are the same. There are specialty lenders like Seek Business Capital that focus specifically on startup businesses that may have trouble finding financing elsewhere.
Related: How to Leverage Financing Today to Grow Your Business Tomorrow
4. Educate Yourself on Alternate Funding Sources
A small business loan doesn’t necessarily have to meet SBA loan requirements. In fact, you might not even have to meet a loan officer face-to-face to get a loan approved these days. Alternate funding sources, like Seek Business Capital, provide an online application for a small business loan and can offer a business funding estimate within two hours.
If you’ve been rejected for a small business loan, don’t feel as if an SBA loan or a business loan from a large bank is your only option. Lending standards can vary dramatically from institution to institution, so take a look around and familiarize yourself with the existing lending landscape. Things are very different than they were in the days before the internet.
5. Don’t Give Up
Just because you’ve been rejected for a small business loan doesn’t mean that your business isn’t viable or that you won’t go on to do great things. If you do get rejected for a business loan, take it as a learning experience. Carefully analyze the elements that led to your rejection and piece together a winning plan to overcome those obstacles on your next go-around.
If you made simple documentary mistakes, clean those up and refile your application as soon as possible. If your business isn’t quite ready to get a loan from a large bank, try to find an alternative lender that caters to startups or companies with short operating histories. Whatever shortcomings triggered your loan rejection, understand that there’s a path to obtaining financing in the future. You owe it to your business to keep fighting for it.
Read: 7 Lessons Entrepreneurs Wish They Learned Earlier
The Bottom Line
Let’s face it, no company lists “being denied a small business loan” in the objectives portion of their business plan. Yet, business loan rejection is a fairly common occurrence. Banks generally only lend money to businesses that have a high probability of paying them back, and newer business with limited operating histories just have too many unknowns for the most conservative lenders.
But this shouldn’t stop you from seeking financing from additional or alternative sources. Use your loan rejection as a tool to learn how to better position your business for future success. Successful entrepreneurs don’t let a few bumps in the road get in the way of their vision. The best path forward is to dust yourself off, fix what needs to be fixed and find a lender that’s willing to work and grow with your company.
More From Seek
- 25 Side Hustle Ideas to Increase Your Income
- What Percentage of Small Businesses Fail?
- The 20 Best Businesses to Start
Business Loan Resources
Photo credit: OSABEE/Shutterstock.com