When you need a loan for your business, but keep getting declined, it can be frustrating and disheartening. Whether the need is for working capital, expansion, or addressing unexpected expenses, hearing “no” from lenders can feel like hitting a brick wall. But a decline doesn’t mean you’re out of options.
In this guide, we’ll dive into the most common reasons lenders decline loan applications, as well as how to improve your business’ eligibility. Lastly, we will touch on alternative financing solutions that may be worth looking into, depending on your need.
Section 1: Diagnose the Problem—Why Are Business Loans Declined?
Understanding why a lender declined your loan application is the first step toward resolution. Below are the most common reasons lenders decline loan applications, along with insights into their impact and how you can improve your business’ eligibility.
Reason 1: Poor Credit History
Credit history is perhaps the most influential factor considered by lenders when evaluating a loan application. Lenders often review both personal and business credit reports, considering the probability of repayment. Poor credit history communicates to the lender that the applicant may not pay their bills reliably, which increases risk. Limited credit history can also cause lenders to hesitate, because of the unknown.
Often, lenders consider personal credit scores below 600 (or business credit scores below 50) as red flags. Even businesses with strong cash flow can face rejection if they have a history of missed payments, defaults, or bankruptcies.
How To Improve Credit Score
For individuals with limited credit history, the best thing you can do is start small, building a history of timely payments. Even if your initial request was declined, you may be able to secure a smaller loan, allowing you to build your credit while improving your cash position. Over time, this will help raise your score.
For individuals with poor credit, start by paying down existing debts and avoiding late payments. You can also review your credit report to ensure that there are no errors or fraudulent activity.
For businesses, the process is similar. Consider opening trade accounts with suppliers, and be sure to pay bills on time. Double check that your business is properly registered with credit bureaus.
If you have any revolving lines of credit (such as credit cards), consider paying them down more frequently. The percentage of credit used is the second largest factor influencing your credit score (just behind payment history). By paying down revolving credit more frequently, you decrease your average credit usage, thereby increasing your credit score.
If your credit is severely damaged, consulting with a professional credit repair agency may be beneficial.
Reason 2: Insufficient (or Inconsistent) Cash Flow
Lenders want assurance that a business can comfortably repay a loan, and cash flow is a primary indicator. If a business’ income isn’t sufficient to cover operational expenses and loan repayments, the request will probably be declined.
Seasonal businesses, startups, or companies reliant on long payment terms with clients can run into these problems. Even if they are profitable, inconsistent cash flow, can signal instability in the lender’s eyes.
Stabilize and Document Your Cash Flow
Lenders want assurance that your business has reliable cash flow to cover loan payments. Strategic cash flow management can help position your business better.
A few methods of improving cash flow include streamlining your invoicing and accounts receivable. Invoicing promptly and enforcing clear payment terms with clients can help you collect cash faster, reducing your Days Sales Outstanding (DSO), improving your cash position.
Check out our article to learn more cash flow strategies: 15 Strategies to Improve Business Cash Flow
If inconsistent cash flow is the nature of your industry, be sure to provide accurate financial statements, cash flow projections, and income records, demonstrating your business’ ability to repay the loan.
Reason 3: Lack of Collateral
Collateral is a lender’s safety net, providing them with an asset to leverage if the borrower defaults. Many traditional lenders require tangible assets, such as property, equipment, or receivables, to reduce their risk. Businesses without sufficient collateral, or those with assets that are difficult to liquidate, frequently face rejection.
In industries with few tangible assets, this problem comes to the forefront. Consulting or staffing agencies often face more financing challenges since they typically own less physical collateral that can be used to secure a loan.
Build Collateral or Strengthen Your Asset Base
Solving the problem of insufficient collateral isn’t easy and is sometimes impossible. Most community banks (which account for 36% small business lending) prefer real estate and equipment, but below are a few other strategies.
Consider assets such as inventory or receivables. Some lenders may consider non-traditional assets, such as purchase orders, contracts, or intellectual property. If all else fails, some business owners leverage their personal property for the sake of the business.
Reason 4: High Debt-to-Income Ratio
Similar to a business’ cash flow, the debt-to-income (DTI) ratio provides an indicator of cash flow health, focusing entirely on income and debt. The DTI ratio shows how much of a business’ revenue is already committed to existing debts. A high DTI ratio suggests that a business may struggle to take on additional debt, even if its current cash flow appears stable.
For example, lenders often consider businesses with monthly debt obligations exceeding 60% of their revenue to be too risky. This is a common issue for companies that have relied heavily on financing for growth or to cover operational expenses, leaving them with limited room for new obligations.
Reduce Your Debt-to-Income Ratio
Reducing your DTI ratio requires either increasing revenue or decreasing monthly debt obligations. Businesses can achieve this by consolidating existing debt, which can result in a single, lower interest loan, or by paying down existing debt, prioritizing the loans with the highest interest rates. Sometimes the only thing you can do is wait it out, avoiding unnecessary debt as you pay down existing obligations.
Reason 5: Incomplete or Weak Application
Lenders often decline applications that are missing critical documentation, contain errors, or fail to present a strong business case. Lenders need detailed and accurate information to assess the risk of lending to your business, so incomplete or unclear applications can slow down, or end, the process.
Common mistakes include omitting financial statements, failing to explain how the loan will be used, or providing inconsistent revenue figures. These errors not only delay the approval process, but can result in outright rejection.
Strengthen Your Business Plan
A strong, detailed business plan can make a significant difference in how lenders perceive your loan application. A clear plan demonstrates that you’ve thought through your goals, how you will use the loan, and how you intend to repay it.
Define clear objectives, provide financial projections, and be sure to highlight your track record. Successful industry veterans with a proven history of building strong revenue streams are more likely to be considered.
Work with a Financial Advisor
Sometimes, navigating the complexities of financing requires professional assistance. A financial advisor can help you understand why you were declined and develop a strategy to improve your eligibility.
Improving your eligibility is a gradual process, but it’s an investment in your business’s financial future. By addressing the specific reasons for rejection and strengthening your overall financial position, you can increase your chances of approval.
Section 2: Alternative Financing Options
Businesses need financing for various reasons, and different financial challenges require different solutions. Below, we break down common funding needs and the alternative financing options best suited to address them.
Alternative Financing for Working Capital Gaps
Businesses often experience short-term cash flow gaps due to slow-paying customers, seasonal revenue fluctuations, or the need to cover operational expenses like payroll, rent, or inventory restocking. This challenge is sometimes just part of the nature of doing business in industries such as temp staffing, manufacturing, or trucking.
Invoice Factoring
If your company carries commercial accounts receivable, invoice factoring (also known as accounts receivable factoring) could be the solution. This option doesn’t technically involve debt, but it can be more costly than a traditional loan.
Invoice factoring involves selling your unpaid invoices (or accounts receivable) to a factoring company in exchange for immediate cash. The factor advances a percentage of the invoice value (typically 80–90%) upfront and releases the remainder (minus fees) once the client pays the invoice.
Factoring is ideal for businesses that carry commercial accounts receivable with long payment cycles.
Learn more about Invoice Factoring: Factoring 101: The Ultimate Guide to Invoice Factoring
Supplier Credit Terms
While not classically considered a form of financing, supplier payment terms are still a form of external credit. Negotiating with suppliers to extend payment terms or allow multiple installments can provide your business with breathing room. While this may strain vendor relationships if overused, it can be a cost-effective way to manage short-term cash needs without requiring third-party lenders.
Merchant Cash Advances (MCA)
A Merchant Cash Advance is a lump sum that can be advanced to a business in exchange for a portion of future sales. Essentially, it’s mortgaging future cash flows. An MCA can solve immediate cash flow problems, but comes with extremely high costs, annualized rates sometimes exceeding 120%. At Flexent, we do not recommend MCAs, and urge businesses to avoid them at all costs. The industry is poorly regulated, making MCA lenders more predetory and less accountable. Additionally, repayment is made daily or weekly as a percentage of sales, making it hard for businesses to stabilize after using an MCA.
Alternative Financing for Expansion and Growth
Expanding operations requires significant upfront capital, whether you are opening a new location, hiring staff, or launching a new product. Traditional loans can be difficult to secure if the business lacks a proven track record or collateral. For example, a consulting company may expand by hiring remote staff, but may not have sufficient tangible collateral to fund that growth.
Revenue-Based Financing
Revenue-Based Financing resembles an MCA, but typically has a lower APR. This option ties repayment to a percentage of future revenue, making it a flexible solution for businesses expecting growth but currently lacking cash reserves. While interest rates are higher than traditional loans, the repayment terms scale with your income, reducing pressure during slow periods and offering flexibility to seasonal businesses. Often APRs fall between 20–40%, and the flexible repayment schedules can increase total costs if revenue fluctuates.
Equity Financing
Selling a stake in your business to investors can provide substantial funding without the burden of repayment. However, this comes with the trade-off of giving up some control over your business decisions.
Invoice Factoring
Invoice factoring can also be an excellent tool for funding expansion. If a business carries accounts receivable, they can sell those receivables to a factoring company in exchange for immediate cash, allowing them to fund growth.
See: Invoice Factoring: A Strategic Growth Tool
Alternative Financing for Capital Expenditures
Investing in equipment, technology, or other tangible assets is essential for business growth, but these purchases often require significant upfront costs. Businesses without substantial reserves or collateral may find traditional financing inaccessible.
Equipment Financing
Loans specifically designed for equipment purchases allow businesses to spread out costs over time. The equipment itself is the collateral, making the loan easier to secure than general-purpose loans. These loans can be limiting, since the funds can only be applied to equipment purchases and if the equipment loses value quickly, you may end up paying more than it’s worth.
Additionally, leasing agreements may be a viable solution for companies looking to preserve cash flow and flexibility.
Vendor Financing
Similar to equipment financing, some vendors offer installment payment plans for equipment purchases. While these may involve higher interest rates, they eliminate the need for third-party lenders and often require less stringent qualifications.
Alternative Financing for Payment Gaps
Many businesses operate on long payment cycles, where invoices may take 30, 60, or even 90 days to be paid. This creates significant cash flow issues, especially for businesses with ongoing operational expenses.
Invoice Factoring
This is where accounts receivable factoring really shines. It allows businesses to sell outstanding invoices to a third party in exchange for immediate cash. This eliminates the waiting period, allowing companies to operate on a cash basis.
See: 6 Factoring Myths That Stop Businesses From Growing
Asset-Based Lending
Unlike factoring, this option allows businesses to borrow against their receivables while retaining control over collections. However, it may involve stricter qualifications, including a review of client creditworthiness.
Alternative Financing for Emergency Expenses
Unplanned events—such as equipment breakdowns, natural disasters, or sudden market shifts—can require immediate funding. Traditional loan applications may take too long to process, leaving businesses in need of faster options.
Business Credit Cards
A well-managed business credit card can provide instant access to funds for smaller expenses. However, high-interest rates make this a less sustainable option for long-term needs.
Merchant Cash Advances (MCA)
While costly, MCAs provide fast funding based on future sales. Once again, at Flexent, we recommend avoiding MCA lenders at all costs.
Alternative Financing for Startups or Early-Stage Businesses
New businesses often struggle to secure traditional financing due to a lack of operational history, creditworthiness, or collateral.
Personal Savings or Loans
Many startups rely on personal funds to get off the ground. This avoids debt but places personal finances at risk. Business owners may also turn to personal loans or peer-to-peer lending platforms to secure funding. Often, these loans have faster approval processes, and potentially more flexible terms. However, if you use personal loans for business, it ties your personal credit and assets to your business risk.
Crowdfunding
Platforms like Kickstarter or Indiegogo allow businesses to raise funds for specific projects by appealing directly to customers and supporters. Crowdfunding requires a strong marketing campaign but doesn’t involve debt or equity. Since crowdfunding doubles as a marketing tool, it can raise awareness and build customer loyalty. However, it can easily not produce the results you’re looking for, since it depends heavily on marketing.
Micro-loans or Grants
Some organizations and governments offer micro-loans or grants specifically for startups, especially in underserved communities. These programs often have lenient requirements but limited funding amounts. Grants don’t require repayment (although applications can be time intensive, highly competitive, requiring detailed proposals), while micro-loans offer smaller amounts with lenient terms.
Conclusion: Finding the Right Path Forward
Facing repeated loan rejections can feel like a major setback, but it’s also an opportunity to reassess, realign, and explore alternative strategies to meet your business’s financial needs. By understanding why your applications have been declined, matching the right funding options to your goals, and working to improve your financial position, you can turn challenges into actionable steps toward growth and stability.
Whether your business needs working capital, funding for expansion, or a way to manage cash flow gaps, there are alternative solutions available beyond traditional loans. Options like invoice factoring, equipment financing, or even crowdfunding offer practical alternatives tailored to specific challenges. The key is identifying what works best for your business and weighing the benefits against the drawbacks.
Ultimately, the best financing option is one that supports your long-term goals while addressing your current challenges. By applying the insights and strategies in this guide, you can regain control over your business’s financial health and find the resources you need to thrive.
