What can I do if my business loan is not approved?

After gathering all the required business loan documents and going through the application process, it can be very disheartening for a small business owner to learn that their application has been denied.

Fortunately, a rejected loan application isn’t always the final verdict on you or your business. It may simply mean there’s an issue in your loan application that you need to address. Keep in mind that in today’s business environment, many lenders have toughened their requirements, and you may need to do a little more work than in the past to make your case.

Here is some advice on what to do if your loan application was rejected.

Make sure you understand why the bank said “No”

When a lender sends a letter saying your application was declined, the reasons may be brief, such as “incomplete or incorrect information” or “debt-to-income ratio too high.” You may not understand exactly what the concern was, especially if you’re new to borrowing.

Before you reapply, sit down with a small business specialist to understand exactly what the issue was. Once you have that information, you can work together to come up with an appropriate plan of action.

Address red flags proactively

Common reasons for loan rejection are not having a long track record in business, deteriorating business conditions in the industry where you operate and poor cash flow.

If the lender is concerned about something you can control, correcting the situation and then reapplying may be the best course of action. For instance, if your rejection was because of cash flow problems, taking steps like sending out invoices more quickly or delaying spending on optional purchases should help you move the needle in the right direction. For other ideas, see “Seven ways to improve cash flow.”

In some cases, the owner’s personal or business credit score is a factor.

If your application was rejected for that reason, learn what goes into your business credit score and how to build your business credit. Working towards improving your score by, for instance, paying down debt, could give you access to more financing opportunities.

Make sure you applied for the right financing

What if your loan was rejected because of factors you can’t change like the number of years in business or a crisis in your industry? Ask your banker for advice and familiarize yourself with other credit products or financing options that may be available to you. Some lending products are better suited for businesses in those situations than others. Even if you’ve already been turned down for a traditional small business loan, you may qualify for specialized financing.

Prepare a new loan application

Before you apply for credit again, give yourself a refresher on the process by reading
“Factors that impact loan decision and how to increase approval odds.” It includes a list of documents you’ll likely need to gather. Pulling them together ahead of time will help you avoid delays.

Then it’s time to prepare your application with your banker. Lenders often consider two broad areas when they look at loan applications: Your plan for using the loan and whether you and your business have the capacity to repay it.

Make sure you can explain clearly how you will use the funds and why you need the specific amount you are seeking. Applying for too much or too little capital can be red flags for lenders. Your banker can offer guidance on the amount of financing that is customary for specific types of projects. Showing your capacity to repay the loan should be easier this time around if you’ve taken the time to address any issues your lender raised initially. Sharing a business plan or marketing documents can help you make a stronger case.

Ultimately, applying for small business credit can take some effort, but it’s well worth your time. There are few better investments in the future of your business than going after the financing you need to weather a tough time or pursue an exciting new opportunity.