5 Ways to Overcome a Loan Application Rejection

Having your loan application rejected by a bank can be discouraging, but it doesn’t mean you should give up your hunt for financing. With credit tight and the economic future uncertain, many small businesses have been feeling the sting of rejection lately. If your small business loan application has been turned down, here are some things you should do to get back on track.

1. Investigate and Ask Questions

The first thing you should do when you’ve been rejected for a loan is get a copy of your credit report. If you submit, in writing, a request for a report within 90 days of the rejection, the credit bureau that the lender contacted when evaluating your application must send you a copy of your credit report within 60 days of receiving the request. Having this information can help you to see where your company’s weak points are and what you can do to strengthen your credit worthiness.

It’s also worthwhile to speak with the loan officer who was in charge of reviewing your application to ask why you were declined. While this conversation can be awkward, they’re in the best position to tell you what you can do to improve your chances of success in the future. In some cases, your persistence may even be enough for them to give your application another look, or pass it on to a higher-up who may have more discretion when it comes to approving loans.

2. Review Your Business Plan

Your business plan is a major component of your application. This document is what your bank uses to understand your business, your growth prospects, and your ability to repay. Make sure your plan clearly indicates how the loan will be invested and demonstrates that you’ll be able to make a decent return on the investment. If necessary, hire a professional accountant to review your figures.

3. Minimize Risk

Being too risky is a top reason for loan rejection. Do whatever you can to show a loan officer that your business is a solid and safe investment. This can mean paying down existing debt to manageable levels or taking out sufficient insurance to cover your business. It also means showing that your business model is flexible, so that if one part fails or something goes wrong, you have a backup plan with a variety of options that lead to success.

4. Shop Around

Just because one bank didn’t approve your application doesn’t mean another won’t. Big banks tend to have low approval rates, so if you applied with a big bank the first time around, try looking at smaller, community banks or even credit unions. Smaller banks often have the resources to take a closer look at your application and judge it on more flexible, subjective measures than big banks, who generally take your credit score and other figures, feed them into a program, and get a response based just on the numbers.

Take the time to speak with a loan officer before submitting a formal application to see how much interest they have in your business and get a feel for your prospects at that bank. You may even have a different experience with different loan officers at the same bank, so don’t be afraid to stop by more than once to talk with different people. You can also apply to get an SBA-backed loan, which provides a loan guarantee for small businesses whose applications fall just short of a bank’s requirements.

5. Try Alternative Financing

If you’ve reviewed your application and, even with some finessing, it still isn’t up to the standards necessary to secure a traditional bank term loan, it may be time to look at alternative financing.

Options such as accounts receivable factoring and financing, leasebacks, purchase order financing, or merchant cash advances can get your business the injection of capital it needs with much less stringent requirements on your creditworthiness. These options will generally cost you more, and some are more appropriate for certain types of businesses than others; but if you need the funds, they can be a quick and convenient way to improve your business cash flow.

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Ked Harley
Ked Harley is a writer and researcher for Biz2Credit Business Loans, a leading credit marketplace connecting small- and medium-sized businesses with small business loans, service providers, and complementary business tools. She is also a self-confessed coffee addict working out of New York City. Her interests include business and finance, world news, food, and travel, and she enjoys yoga and running in the park.

6 comments

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  1. Really good advice, Ked! By following advice like this there is no need to be disheartened by a loan refusal, find out what went wrong and how to improve before your next application. There is always an alternative.

  2. Great article! Also thought I’d shed some light on the process behind the scenes, at least with banks. The loan officer is your bank contact, but they work with other people inside the bank. Depending on the size of the bank, they may have an assistant (portfolio manager) that manages the loan portfolio for them. It is the portfolio manager’s job to make an argument to the Risk Manager. The Risk Manager’s job is directly correlated with the number of bad loans in the organization and they have the singular authority to turn your loan down. On the other hand, the loan officer doesn’t get paid unless you get paid for the loan. So like Ked advises above, help your loan officer to plead your case.

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  5. Well said, Good info. There is no doubt that for a new business setup, most of the people take business loan but some people’s loan application is rejected by the banks and lots of people don’t know what the reasons behind are. But thanks for the post, it’s really informative for those people which are need business loan.

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