According to research, only 37% of small businesses apply for financing. Of the businesses that do apply, however, banks reject about 80%. Why might this be?
Banks consider several factors in determining whether or not to approve a loan for a small business. These factors can be both quantitative and qualitative, ranging from a low credit score to industry concerns.
If your loan is denied, the good news is there are many lenders out there with a wide variety of appetites for different lending scenarios. The challenge for most borrowers is they don’t know the right banks to introduce their loans.
This can cause a lot of headaches as they stumble through the process and get turned down repeatedly. Innovative capital leverages a network of traditional and alternative lenders to provide needed solutions when our clients are declined. Many of our clients are referred to us by the lender that declines a loan.
Just because it’s not a good deal for one bank doesn’t mean it’s not a good deal for another bank or an alternative lender. Let’s start a conversation and provide you a free quote.
Read on if you want to know:
- Why your loan application might have been denied
- Or, alternative options to consider instead of (or in addition to) traditional lending
Why Was My Loan Application Denied?
1. Poor Debt-to-Income Ratio
Your debt-to-income ratio (DTI) is the percentage of your business’s gross monthly income that goes towards paying monthly debt payments. Lenders consider your history of debt and DTI to determine borrowing risk.
Since small and medium-sized businesses (SMB) owners often seek multiple sources of credit, especially during their business’s start-up phase, they may experience a high rate of rejection when applying for loans.
According to the Federal Reserve Bank’s Small Business Credit Survey, a high level of debt is the most common reason for a small business loan application rejection.
2. Inconsistent or Low Cash Flow
Lenders may reject businesses with inconsistent or poor business performance, due to concerns that the business will not be able to repay the loan.
Lenders instead favor small businesses that demonstrate a steady revenue stream and consistent monthly cash flow. Issues with cash flow may include:
- Major dips or decreases in cash flow
- Insufficient overall cash flow
- Seasonal fluctuations
3. Low Credit Score
Lenders may consider poor personal and/or business credit scores as an indication that you have high levels of outstanding debt or that you may struggle to make payments on time.
4. Insufficient Collateral
Collateral refers to the assets a business owner may pledge to the lender for the life of the loan to reduce the lender’s risk.
Assets that can be pledged as collateral include, but are not limited to:
- Business Equipment
- Real estate
- Cash
- Future earnings
- In some cases, personal assets such as a house or car
Insufficient collateral can become an issue for small businesses that do not own real estate or other valuable assets. However, there are other lending options available that do not require collateral, such as peer-to-peer (P2P) lending.
For more information on P2P lending, learn why alternative lending is your best-kept secret.
5. Industry Concerns
Particular industries associated with a high rate of failure may be considered “high-risk” ventures. These industries and their risks may include, for example:
- Hospitality → Unpredictable revenue
- Alcohol and/or Firearms → Vulnerable to legislation changes that can affect business
- Gyms and Retail → Competitive, highly populated market
- Technology → Can be replaced and made obsolete within a short period of time
What Can I Do If a Bank Declines My Loan Application?
If a bank declines your loan application, don’t give up! There are still many options available to you.
Adjust Your Application and Reapply
You can begin by contacting your lender and requesting a detailed explanation outlining why your business was denied. You can use this explanation to adjust and improve your pitfalls to either reapply at the same bank or to a different financial institution.
For instance, these adjustments may include:
- Improving your personal and/or business credit score
- Paying off some of your business’s debt to improve your debt-to-income ratio
- Stabilizing cash flow by improving off-season business or creating payment plans for customers
Interested in learning more? Read understanding business loans and how to calculate them for more information on exactly what to expect when applying for a business loan.
Consider Alternative Lending
You may select alternative lending to either replace or bridge the gap between traditional loans.
Alternative lending, also known as alternative financing, is a broad term that refers to any type of lending that does not come from a traditional financial institution, such as a bank. Alternative financing is an option for those who need funding in a timely manner or who have had difficulty being approved for traditional loans.
Typically, alternative lending has the benefits of:
- Quick approval turnaround
- A simple application process
- More lenient guidelines than compared to traditional financing
Alternative Lending Options
Alternative lending provides a range of options to consider. A few examples include:
- Lines of credit
- Bridge loans
- Hard money loans
- Crowdfunding
- Peer-to-peer lending
- Asset-based loans
To learn more about alternative financing and discover which option best fits your business, read our guide to alternative lending for small businesses.
How Can Innovative Capital Corporation Help?
At Innovative Capital Corporation, our goal is to find innovative solutions to secure the best deals for our clients. Get started with us today and learn how we can help find the best rates and terms for your unique business needs.
