Getting a business loan through a bank can be difficult, and the process can be discouraging. Banks deny most business applications because the default rates for business loans are much greater than for personal loans, credit cards, and mortgages.

So, as a business owner, what do you do next after a bank declines a business loan? The good news is there are alternatives to traditional business loans and business lines of credit at a bank. Let's explore the next steps after being declined for a business loan at a bank.

A picture of two business partners reviewing credit reports to describe an article about the reasons why banks may decline business loan applications and how to overcome the situation.

4 Steps to Follow After Your Business Loan Decline

Identify the reasons for decline from the Bank. Determine rejection reasons.
How to improve your chances of getting approved in the future
Research alternatives to bank business loan products
Build your knowledge of business funding options: Arm Yourself With Knowledge and Persist.

Digesting the reality that you can't secure a business loan or line of credit from the bank at this moment is just the first step. Now, it's essential to understand the reasons why. Nevertheless, it's time to roll up your sleeves and continue your finance-seeking journey.

Understand the Reasons Behind Your Business Loan Denial

Once you are rejected or declined for a business loan or business line of credit, find out all of the reasons why it was not approved. Often, stringent requirements from banks like Bank of America may lead to any shortcomings in areas such as your business borrowing history or credit score resulting in a disapproval. Banks generally give you one reason and call it a day, but it's necessary to dig deeper into the aspects of your business banking practices that may have resulted in loan denial.

Consequently, ensure to stress your desire to know ALL of the reasons and put all the gathered paperwork in writing, as communication with the banker is crucial. This comprehensive insight will aid in mitigating issues and improving outcomes on future business loan applications, especially with the knowledge that getting the paperwork in order ahead of time can streamline the loan approval process in the future.

Fundamental Reasons Why Your Business Loan Application Was Denied

Getting your small business loan application denied can be frustrating, but it's important to understand why it happened. There are several reasons why your application might have been rejected, including a poor credit score, insufficient collateral, insufficient cash flow, or a lack of business history.

It's important to address these issues before applying again to increase your chances of approval. You may also consider exploring alternative financing options such as invoice financing, merchant cash advances, or crowdfunding. By understanding the reasons for the denial and taking steps to improve your application, you can increase your chances of obtaining the funding your business needs to succeed.

Lets dive into reasons for denial:

1. Personal Credit

Many business owners don't realize that their personal credit plays a large role in credit decisions with banks.

Banks assess credit in the following ways;

Banks look at credit utilization rate, typically desiring a rate of 30% or less, as a key component of your ability to secure a loan.
Expect to see excellent credit scores, usually exceeding 720 or better.
Value at least three open and active trade lines on your credit history over three years old, with high credit limits.
A balanced mix of installment loans like car loans or mortgages and revolving credit like credit cards.
If your credit utilization is higher than ideal, it is advisable to reduce it as it could be viewed as risky. Businesses with high credit utilization might be perceived as maxed out, thus reducing your chances of qualifying for a loan.
Your debt-to-income ratio also plays a critical role in the credit decision process, according to our knowledgeable editorial team. Banks generally desire a lower debt-to-income ratio before granting a loan, so if this ratio is high, it might be beneficial to pay down your debt and reapply.

2. Business Credit

Business credit sometimes takes five years to establish and is only based on your current business. For those new to the business world, particularly those aiming for small business financing, can be monumental in understanding the challenges associated with business credit. It is relevant to note that businesses less than three years old often have no established business credit or borrowing history.

Business Credit comes not only from repayment to your vendors and suppliers but also from the entities they report to, such as Experian Business Credit, Dunn Bradstreet, or Equifax Business Credit. By ensuring accurate and timely information, editorial content like these can significantly affect the business borrowing process.

3. Cash Flow or Bank Statement Issues

Business Lenders evaluate the business's cash flow by looking at the operating account business bank statements. They are especially focused on your bank statement's placement in relation to your business's financial projections based on your transaction history. By assessing daily business activities with respect to Debits and Credits, they analyze how you manage these against the balance you maintain in the business account.

Their examination hones in on specific elements in your business bank statements: the total volume of deposits or credits per month, the number of these deposits, the frequency of deposits every month, the amount of debits per month, along with their origins, daily bank balances, and the average bank balance. In addition, they are interested in your current lines of credit usage and search for a strong repayment history. This might help in securing preferable repayment terms and conditions with potential lenders, an important factor especially if you encountered issues like higher interest rates or shorter terms in past borrowings.

4. Financial Statements

Banks and lenders look at Financial Statements to help evaluate the business's creditworthiness. You should receive a notification after such an evaluation of;

Past Business Tax Returns
Current and past Profit & Loss Statements, and Balance Sheets.
Additionally, depending on the type of business, an analysis of both Accounts Receivable Ledgers and Accounts Payable Ledgers accompanied by notification may also be required.

Many younger businesses under five years old may not show enough profits for banks because newer businesses have a lot of initial capital investments that they can write off on business taxes. If you don’t receive this notification, it's advisable to contact the lender directly to determine why your application was denied.

5. Time in Business

1 of every two registered businesses will fail in the first year. Many startup loans, banks won't consider for new businesses (less than three years) as they prefer to assess the business based on at least a three-year performance to evaluate repayment ability. Past business ownership doesn't carry much weight with banks, nor does the ability to cover costs like utilities or rent. As per the 2023 Report on Non-employer Firms, over a third of startups were denied business loans, many due to lack of a rental property or an inability to meet the rental property depreciation limit.

The longer the business has been in operation, the more business funding options are available, with better terms, including potential leniency towards rent and related expenses. As a startup owner, sometimes situations arise that are out of your hands. It's key to understand what's available at different stages of your business's maturity, including rent considerations and depreciation limits. Sometimes, a financial boost isn't an option, and that's perfectly fine.

What Steps Can I Take to Improve My Business Loan Application?

Improving your business loan application is crucial to increase your chances of getting approved for funding. There are several steps you can take to improve your business loan application. Shop around for lenders and loan products that best meet your business's needs, and only apply for loans you're confident you can repay.

1. Improve Personal Credit

Get a copy of your personal credit at the time of your application and evaluate it. Inspect your credit utilization rate, as lenders generally desire a rate of 30% or less. AdvancePoint Capital published a comprehensive business guide, "Common Questions About Getting Small Business Loan with Bad Credit," which offers an in-depth exploration of factors business lenders examine in business owners' personal credit including credit utilization. The guide also covers how personal credit works, how FICO scores are determined, and steps to boost your personal credit scores.

2. Improving Business Credit

Unlike personal credit, there is no standard business credit report, but there are simple steps you can take to build business credit fast. Understanding your business borrowing history is a vital aspect of this process. AdvancePoint Capital Business Wire drafted a useful business guide, "How Does Business Credit Work: A Simple Guide to Establishing and Maintaining Business Credit," which provides insightful details on how business credit functions. It also offers valuable information on small business financing and how to sharpen your borrowing history to facilitate business growth. This thorough read is certainly beneficial.

3. Strategies to Improve Cash Flow and Business Bank Accounts

Business bank account health is important to lenders and banks when evaluating your ability to handle a business loan payment. This is central to a business loan underwriter when they are trying to prove the business has the ability to repay the business loan.

5 Quick Tips to Have Healthy Cash Flow in the Eyes of a Business Underwriter

Maintain at least one month of expense payments in reserves in your business bank account. Nurturing a robust business banking relationship is key to this, as banks see this as a display of healthy liquidity. A tip to remember here is to make sure you promptly respond to calls and emails sent by the bank to keep the transaction process moving steadily. A low average daily balance in a business bank statement can result in a rapid decline in your standing, primarily in instances of unexpected revenue dips.
Never have overdrafts, non-sufficient funds, or returned checks/items. Keep in mind as part of your banking strategy that these red flags may often translate to increased scrutiny or even outright declines for small business loans.
Get Overdraft Protection for your Business Bank Account. Employing such protective services can be beneficial in upholding your banking reputation as well as ensuring a stable cash flow.
Work with your Vendors and Suppliers and negotiate repayment terms that allow for longer to repay them BEFORE your bank account cash reserves are exhausted. A notable detail here is that lenders often shy away from offering funds for high-risk trades, typical examples being agriculture, construction, and gambling. Hence, it would be an advantage to keep a strong repayment record to boost your business credit profile.
Don't spend more than is coming in in sales, and consistently maintain cash reserves for a rainy day! Work towards fostering a business financial behavior that promotes a low utilization rate - an aspect that ties closely to significantly enhancing your chances for securing better borrowing terms.

What Steps Can I Take to Improve My Business Loan Application?

1. Improve Personal Credit

Get a copy of your personal credit at the time of your application and evaluate it. AdvancePoint Capital wrote a Business guide, "Common Questions About Getting Small Business Loan with Bad Credit," which explains in great detail what business lenders look at regarding business owners' personal credit. The article also talks about how personal credit works, how FICO scores are derived, and how to improve your personal credit scores.

2. Improving Business Credit

Unlike personal credit, there is no standard business credit report, but there are simple steps you can take to build business credit fast. AdvancePoint Capital Business Wire wrote a business guide, "How Does Business Credit Work: A Simple Guide to Establishing and Maintaining Business Credit," which will take you step by step on how business credit works and how to improve and grow your business credit. Check it out it's a great detailed read for sure.

3. How to Improve Cash Flow and Business Bank Accounts Health

5 Quick Tips to Have Healthy Cash Flow in the Eyes of a Business Underwriter

Maintain at least one month of expense payments in reserves in your business bank account. Having reserves for unexpected revenue drops is vital to business bank account health. A low average daily balance in a business bank statement can lead to a quick decline.
Never have Overdrafts, Non-sufficient funds, or returned checks/items
Get Overdraft Protection for your Business Bank Account
Work with your Vendors and Suppliers and ask for some longer terms to repay them BEFORE your bank account cash reserves are depleted.
Don't spend more than is coming in in sales, and always maintain cash reserves for a rainy day!

How to Get Your Financial Statements House in Order

Investing in good account software like QuickBooks or similar software bookkeeping and designating yourself, an employee, or a bookkeeper to maintain accurate books is essential. This approach ensures the integrity of your financial records, reducing the risk of projection errors in the future. Too often, business owners attempt to wear all hats, ending up with poorly managed books. Recognize your limitations as the owner.

At the end of the day, whether it's you, the owner, handling this, or a designated individual, the business owner will ultimately be held accountable for the financial statements' accuracy—similar to how the editorial team is responsible for fact-checked content. Implement regular monthly management of your financials.

Select a specific day every month for financial reconciliation and strictly adhere to it. This organized approach helps in producing accurate statements on demand such as Balance Sheets, Profit & Loss Statements, and Accounts Receivable/Payable Reports, providing credible guidance for your business growth and disclosure for potential investors.
Ensure to record all relevant data and monitor your business bank account and receivables/payables DAILY. Avoid taking shortcuts or being disorganized—a trait the editorial team at Bankrate also abides by. Business lenders appreciate enterprises that can provide documentation quickly and accurately in an acceptable account principal's format. This not only simplifies the lending process, but also aids in creating trustworthy financial projections.

After all, making sound business decisions is possible only when you have correct facts at your disposal—much like in editorial content. Get your financial house in order—it will swiftly improve your business health. Make sure all information related to your business is accurate and up-to-date, just like our editorial team ensures for their content.

Below is a checklist of items to review for accuracy.

Business Listing Accuracy Assessment Checklist

Secretary of State Filings: Ensure your business is filed correctly as a Corporation, LLC, LP, or other formation types. Check that all annual reports and filings, and fees are paid up to date. Check for accurate information, like does it show the proper owners attached as officers to the business. If not, file the necessary amendment with your States Secretary of State. A lot of this can be done by going to the respective State where you filed and searching the State's Secretary of State website.
Business Listing on Google Business Profile: This is very important. Many lenders today require accurate business listings, and they conduct Google searches of your business in underwriting when considering your business loan application for activity and relevance in your industry. Check your "Google My Business" business profile. If you have not already claimed it does so ASAP. If you search your business on Google by your company name and your Google Business Profile does not show you don't have a listing, you need to claim one and complete all relevant information. If, or once, you are listed, check for the proper company name, address, hours, phone number, company description of services, and what you do, answer any pending questions, and manage those REVIEWS!
Register your Business with Multiple Listing Directories: Showing that your business is established and relevant is important. List your business with Facebook, Twitter, LinkedIn, Dun Bradstreet, Yellow Pages, Better Business Bureau, Yelp, and others. The following is a list of the 55 largest local business directories in the United States. If you want to register to all directories at one time, https//yext.com is a great resource to do so for a nominal fee
Check public records: Check public records for judgments and/or liens against your business and you or anyone else who owns the business. Also, criminal records check on all owners, both County and State.

See Yext website below at YEXT.com

Consider What Other Business Loan Alternatives Are Available for You Now

Just because a bank turns you down for a business loan or business line of credit doesn't mean the search is over! Many other products available may be able to fulfill your need for capital for the Business.

Check out AdvancePoint Capital's Business Wire, which has a complete guide to other business funding products, "The Small Business Lenders Marketplace: A Complete Guide." Within that guide, you will discover other sources besides Banks after various business loan products.

10 Alternatives to Bank Business Loans for Small Business Financing

1. Small Business Administration Loans (also known as SBA Loans):

These loans often have availability even for those with less-than-perfect credit scores.

2. Short-Term Business Loans

These are term loans often have availability even for those with less-than-perfect credit scores or deficient in the Financial statements.

3. Short-Term Business Lines of Credit

These are typically provided by collateral lenders, where the loan collateral ensures the repayment.

4. Merchant Cash Advance

This financing option doesn't need you to put up loan collateral as it relies on your future income.

5. Business Cash Advance

Similar to merchant cash advances, these are also unsecured business financing options.

6. Equipment Financing/Leasing

This is a secured business financing option where the equipment acts as the collateral.

7. Invoice/ Receivables Financing:

This is another form of small business financing where the invoices act as loan collateral.

8. Business Credit Cards

Unsecured business credit cards can also act as a loan without collateral required to back the amounts you borrow.

9. Personal Credit Cards

Personal credit cards can also be utilized for small business financing.

10. Personal Home Equity Loans

Some businesses might opt for this if other avenues of business financing are not available.

When Denied, Get Educated, and Don't Give Up!

Don't get discouraged when turned down at a Bank for a Business Loan. Your application's rejection shouldn't plunge you into despair, especially if your startup loans didn't get the nod of approval; there's no need to abandon ship!

A myriad of other business funding alternatives await on the horizon The roadblock, however, lies in gaining a comprehensive understanding of what these avenues entail, how they function, and what prerequisites they require.

Setting aside time to thoroughly fact-check editorial content online can aid in unraveling the complexities tied to options that could potentially uplift your business. A poor credit score or an unstable economy should not spell doom for your business aspirations.

Advancepoint Capital is a Marketplace Business Lender, one who ushers in an array of product suites in tune with your requirements, instead of a lender whose sole intent is to pigeonhole your business into their limited product stipulations. It's important to note that not all alternative business funding streams are cut from the same cloth.

Partnering with a Market Place Business provider unveils a richer palette of options, empowering you to review, select and ultimately, save money. Amidst this barrage of possibilities, ensure you seek out a substantial source of guidance, by maybe subscribing to relevant notifications or alerts. Remember - education and choice pave the way for freedom and opportunity!

4 Steps to Follow After Your Business Loan Decline

Understand the Reasons Behind Your Business Loan Denial