What to Do If You Can’t Get a Business Loan

It happened: Your loan application for the financing your business desperately needs was rejected. Now what? More small business owners are seeking capital than in the first quarter of this year—but they’re having more difficulty getting bank loans, according to the Q2 2019 Pepperdine Private Capital Access (PCA) Index from the Pepperdine Graziadio Business School and Dun & Bradstreet.

Some 36% of small businesses in the survey tried to raise capital in the second quarter, up from 28% in the first quarter. However, fewer than one-third (32%) of small businesses got financing from a bank loan in Q2 2019, down from 44% in the first quarter of this year.

Small businesses are feeling the pinch from naysaying bankers. More than half (52%) say the inability to get a bank loan is restricting their growth opportunities. Forty-seven percent say it’s keeping them from hiring more employees.

Small business owners turn to alternative financing

More small businesses sought alternative funding options in the second quarter. For example:

Business credit cards: 53% in Q2 (up from 42% in Q1)
Crowdfunding: 20% in Q2 (up from 14% in Q1)
Online lenders: 29% in Q2 (up from 20% in Q1)
Factoring: 16% in Q2 (up from 11% in Q1)
Merchant cash advance: 15% in Q2 (up from 12% in Q1)

The report did not research the reasons why more small businesses are seeking alternative financing. However, the authors offer some possibilities:

Alternative lending options could be becoming more sophisticated and more attractive.
There may be more startup businesses, which don’t have enough credit history to get traditional bank loans.
Business owners could be getting frustrated with all the red tape involved in applying for bank loans.

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What to do if you can’t get a business loan

What should you do if you’re turned down for a business loan? Dun & Bradstreet recommends you start by finding out why you were denied. Legally, lenders must give you a reason in writing for why your loan application was not approved.

Based on the reason for your denial, you can take steps to get the financing you need. These may include:

Improve your business (or personal) credit score: If your business is a startup, lenders will look at your personal credit score before approving you for a loan. Visit AnnualCreditReport.com to get a free copy of your personal credit report from each of the three major credit reporting agencies; you’re entitled to one report per agency per year. If you’ve been in business for a while, your business credit score is the primary factor lenders will consider (although your personal credit score will also matter.) You can improve your business credit score by making sure that your creditors report your payments to business credit reporting agencies. Dun & Bradstreet, Experian, and Equifax are the three major business credit reporting agencies, and each allows you to check your credit report for a fee.
Improve your business cash flow: Lenders’ major concern is whether you have adequate cash flow to repay the loan. Even if your credit score is good, lenders may be leery if your cash flow isn’t adequate to the task. Reducing other debt can help free up more cash. Sometimes, simply paying more attention to your receivables can help eliminate cash flow slumps that make lenders nervous. It will take a while to get your cash flow in shape, but it’s time well spent because it prevents you from getting in over your head with debt.
Look for alternative financing sources: A growing number of small businesses are turning to the alternative financing methods mentioned earlier. These methods can offer faster access to capital, less red tape, and more lenient criteria than traditional bank loans.

What to know about alternative financing sources

Alternative financing sources can seem to offer the answer to your prayers. However, it’s important to:

Match the financing source to your needs. If you’re a retailer who needs working capital to stock up for the holiday shopping season, short-term financing options are your best bet. If you need to buy equipment for your business, equipment financing or equipment leasing maybe a smarter alternative than putting the expense on a business credit card.
Be clear on your costs. Alternative financing is generally easier to get than business loans, but the downside is that it typically costs more. In addition to your interest rate, make sure you clearly understand any fees, prepayment penalties, or other costs associated with the loan.
Think it through. Getting alternative financing may not require as much effort as getting a bank loan. However, you should put the same amount of thought, planning, and consideration into it as you would into getting a bank loan.

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