How to Find Alternatives when Your Application is Rejected

For a “small business” (business revenues under $1 million), lenders have 30 days to inform you if the loan will be granted. If not, the lender is obligated to provide a written statement of reasons for denial or a written notice telling you of your right to obtain such a statement. For a larger business (business revenues over $1 million), lenders must inform you if the loan will be granted within a “reasonable period of time.” If denied, you then have 60 days to request a written statement of reasons.

Why was my loan application rejected? Some common reasons include:

  • Inadequate collateral: Banks expect applicants to have enough assets (such as home equity, inventory, or business equipment) to repay the loan even if the company is less successful than expected.
  • No detailed business plan: The business plan is the key for explaining to lenders how your business operates, what projects the loan will be used for, and what the current and expected financial situations of your company look like. Without a sufficiently detailed business plan, it is difficult for the lender to determine whether the loan is a wise decision.
  • No prior experience: Most lenders expect firms to provide three years of financial statements for their company. For start ups, this can make the loan application impossible. Loans guaranteed by the Small Business Administration (SBA) can circumvent this problem.
  • Lack of investment of personal funds in business: Lenders want businesses to demonstrate commitment by putting personal funds towards projects, not relying entirely on a loan. Be sure to show this in your application.
  • No financial planning: Lenders need to clearly see how much money you expect your business to earn after receiving a loan, as well as the expected timeframe for repayment.
  • Poor credit history: Both business and personal credit history play roles in a lender’s decision. A clean credit record showing timely and complete payments gives you a better chance at getting approved. To establish business credit, open a business bank account and credit card and manage both responsibly. Business owners with poor personal credit may still be able to obtain a loan if a business partner has a better credit score, or through a guarantee from a third party such as the SBA.

The Next Step: What to do after your application is rejected

  • Try another lender. Not all banks have the same criteria for lending. Community and national banks have different standards for approving small business loans. Use the feedback from your rejection to improve areas of your application, then try again.
  • Small Business Administration (SBA) loans are available to help small businesses that do not meet the usual qualification criteria. The SBA can guarantee repayment of your loan, making banks more willing to approve your request.
  • Look for programs with community banks that may offer initiatives to increase loans to small businesses.  Community banks focus on the neighborhoods they serve, and are more understanding of the challenges of financing a small business. The Independent Community Bankers of America can help you find a community bank in your area.

Alternative Sources of Funding
Banks are not the only source of loans. If you have been unable to get your small business loan approved by community and national banks, there other potential lenders include:

  • Credit Unions
    Credit unions are not-for-profit cooperatives focused on community development. As a result, they may be more likely to approve loans to local small businesses at reasonable interest rates.
  • Commercially based loan programs
    Sam’s Club, for example, offers matching services to small business friendly lenders to help women, minority, and veteran owners get loans up to $25,000.
  • Credit card cash advances
    Many credit cards come with the option of a cash advance, or withdrawing cash on your credit card as a portion of your total credit line. Be careful when using this loan option; the cash advance will count towards your unpaid balance, and will incur high interest charges on your credit card bill.

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Alternatives