Overcome Loan Rejection: Next Steps for Business Financing

Are you struggling with loan rejection challenges? You’re not alone. Only a small portion of small businesses that apply for funding receive the full amount they request. This is worrisome because the top reason businesses apply for financing is to cover operational expenses, according to the latest Small Business Credit Survey. Without a cash injection, it can be difficult to stay afloat. However, you do have options if you’re facing this common scenario. In this guide, we’ll walk you through the most common loan rejection challenges, how to improve the odds of approval next time, and ways to fund your business now, even if you’ve already been denied by a bank or other business lender.

Understanding Loan Rejection

When we look at requests for business funding as a whole, exploring all types from traditional business loans through lines of credit, only a little more than half are fully approved, according to the Small Business Credit Survey. Around a quarter receive some of the funding they need, and 22 percent are completely denied. Just 38 percent are approved when looking specifically at business loans. In other words, the odds are not in your favor when you apply for a business loan, and most businesses do not receive the funding they need this way.

Most Common Loan Rejection Challenges

Banks cite various reasons for these denials. Below, we’ll review some of the most common explanations.

Bad Credit

Whereas larger businesses often have a credit profile for the business itself, small business owners usually face scrutiny regarding their personal credit scores. Large financial institutions typically look for a minimum personal credit score of 680, though some set the bar even higher.

Insufficient Time in Business

Each financial institution has its own criteria for a business’s length of time in operation. While some will consider providing funding after a business has been in operation for six months, others will not consider lending until the business is one or two years old.

Cash Flow Limitations

Lenders also look at cash flow to ensure you’ll have the cash flow to repay your loan. Some will fund businesses bringing in $100,000 annually, though others set the minimum at $250,000 or more.

Not Enough Collateral

When businesses are weak in areas that are required for loan approval, some lenders will still provide a loan if you can put up collateral to secure the loan. However, because many small businesses don’t have sufficient collateral or their collateral is already pledged, their asset-based lending application is denied.

Missing Documents or Information

Again, in the early stages of growing a business, both the business and the business owner are scrutinized. You must typically provide personal and business documents as part of the loan approval process. This includes:

• Bank Statements
• Tax Returns
• Business Financial Statements (Profit and Loss, Cash Flow, etc.)
• Legal Documents (Articles of Incorporation, Business Licenses, etc.)
• Business Plan and Projections

Debt Utilization

Generally speaking, lenders become concerned about your ability to repay debts if you’re already utilizing more than 30 percent of your available credit. However, some also consider it a red flag if you’re not utilizing available credit, as it may be a sign that you don’t have a strong repayment history.

High-Risk Industry

Your industry is also likely to influence the loan approval process. Not surprisingly, many lenders won’t provide funds to “vice” industries, such as those that generate revenue through gambling. However, some lenders will also avoid industries like construction because client payments can be problematic or delayed, thus influencing a borrower’s ability to repay debt.

Spotlight on Non-Applicants

It’s worth noting that roughly one-third of non-applicants who don’t apply still need cash, according to the Small Business Credit Survey. The top reasons they cite for not applying include:

• Weak Business Financials
• Lender Requirements Too Strict
• Lenders Do Not Approve Financing for Businesses Like Mine
• Was Denied Financing Previously
• Missing Documentation

Your Next Steps for Business Financing

Now that you’re familiar with what lenders are looking for and why small businesses are often denied let’s take a look at what you can do if you’ve already experienced a denial.

Step 1: Communicate with Lenders Post-Rejection

Effective communication after a business loan denial is critical. The lender should provide documentation explaining why your loan was denied. If not, or if it is unclear, reach out to the lender to find out exactly why you were denied.

If it’s something you can quickly fix, they may be willing to reopen your application, or you may be able to correct the issue and reapply successfully right away.

Step 2: Reassess Your Business Plan

If you’ve been rejected for a business loan, reassessing your need and the amount required is the next step. Review your business plan to see if there are things you can do to improve cash inflows or slow and reduce cash outflows.

For instance, you may be able to create a new revenue stream by offering subscriptions, which could eliminate your need for external funding, or you could put growth plans on hold to ensure you meet your current budget without extra funding.

Step 3: Improve Your Financial Management

Take your business plan assessment a step further and explore more ways to improve cash inflows and outflows. See if you can:

• Increase Client Payment Speed
• Reduce Late Payments and Bad Debt
• Cut Unnecessary Expenses
• Defer Expenses
• Find Less-Expensive Vendors

Step 4: Improve Your Creditworthiness

Whether trying to build credit for the first time or recovering business credit, the steps to boost a business credit score are essentially the same.

• Ensure You’re Listed with the Main Credit Bureaus (Dun & Bradstreet, Experian, and Equifax)
• Review Reports for Accuracy and Dispute Inaccurate Negative Remarks
• Ask Non-Reporting Creditors/ Vendors to Report Your Transactions
• Pay Bills Early, Not Just on Time
• Avoid Taking on Unnecessary Debt
• Pay Off Debts to Reduce Credit Utilization

Step 5: Explore Alternative Financing Options for Your Business

If traditional financing options are not on the table, you may still be able to get the cash you need through alternative financing and funding options. We’ll review a few of the most common solutions below.

Crowdfunding

There are many types of crowdfunding, including:

• Donation-Based (People Provide Funds with No Expectation of Return)
• Debt-Based (People Behave Like Lenders Providing a Loan)
• Rewards-Based (Your Business Offers an Incentive for Investments)
• Equity-Based (Investors Receive an Ownership Stake in Your Business)

While these options offer many paths to cash for your business, raising funds this way can be difficult, especially if you don’t sell a product and have no experience hyping up a crowd.

Venture Financing

Generally speaking, venture financing requires giving up equity in your company in exchange for cash. However, you may be able to find venture debt financing that doesn’t have the same requirements.

Merchant Cash Advance

Businesses that allow their customers to pay with credit cards can sometimes qualify for a merchant cash advance (MCA). In these cases, your credit card processor provides a loan and then takes a portion of your credit card sales until the loan is paid back. While this is often more accessible than a traditional loan, APRs can exceed 200 percent, so it’s important to weigh the costs carefully before signing up.

Equipment Financing

With equipment financing, the item you’re purchasing often serves as collateral on the loan. This may allow you to purchase trucks, computers, machines, and other necessities even if you don’t have strong credit. The balance is paid off in installments, similar to a traditional loan.

Invoice Factoring

If you invoice your clients after work is complete or goods are delivered, invoice factoring might be a viable option. Instead of taking out a loan, you sell your unpaid invoices to a factoring company like Viva Capital. The factoring company immediately provides you with most of the invoice’s value right away, then collects the balance from your client when the money is due. You receive the remaining sum after your client pays minus a small fee for the service. Because you’re basically receiving a cash advance, there’s no debt incurred and nothing to pay back, plus most businesses qualify.

Because no debt is incurred and the cash can be used to pay existing debts, many businesses leverage factoring while building their credit score. Others leverage it to help them avoid debt. Many leverage it because payments are fast, too, with same-day payouts available through select factoring companies.

Why Alternative Financing May Be the Best Option After Loan Rejection

If your business loan application was rejected, it doesn’t mean your funding options are gone. Many small business owners face challenges like low credit scores, limited time in business, or insufficient collateral, which are common reasons your business loan request may be denied. Alternative financing solutions provide opportunities to secure funding when traditional loans aren’t an option.

Options like invoice factoring, crowdfunding, and merchant cash advances offer flexible ways to access cash. Invoice factoring allows you to sell unpaid invoices for immediate funds without taking on debt. Crowdfunding connects you with supporters who back your business ideas in exchange for rewards, donations, or equity. Merchant cash advances provide upfront funds repaid from future sales, which is ideal for businesses with steady revenue streams.

While these methods may have higher costs than a traditional bank loan, they can provide quick funding tailored to your business needs. By exploring these alternatives, you can cover critical business expenses, stabilize operations, and continue working toward your business goals, even if a small business loan is denied.

Get Approved for Invoice Factoring with Viva Capital

If you’re feeling stuck with loan rejection challenges, explore factoring instead. Specializing in industries that often struggle with traditional financing, such as transportation, construction, oilfield services, and staffing, and with decades of experience, Viva Capital offers tailored funding to help your business meet its needs today and grow. To kickstart the factoring approval process, request a complimentary Viva quote.