My Banker Turned Down My Loan Application, Now What?

You’re not alone. Depending upon the study you read, as many as 40% to 90% of small business owners get turned away by the bank—many of them are strong and healthy businesses, but get rejected for a number of reasons. If you’ve been turned down by the bank, here’s what you should do next:

1. You need to know why you were turned down: It’s human nature. The loan officer giving you the bad news doesn’t want to get into details that might be difficult for you to hear. Don’t let him or her give you a vague answer. You need to know the reason so you can make adjustments for next time. Was it your credit score? Was it the industry you’re in? Was it your time in business? Was it something else?

Bankers don’t like anything that even looks risky. For example, even if you have a healthy business but have been in business less than four or five years, the bank will likely turn you down. It’s even more difficult for startups or very early-stage businesses to get financing from the bank.

Sometimes it isn’t you, it’s the bank—but there are times when it is you and you need to know what they see that they don’t like.

2. There are options you need to know about: Even though the bank turned you down there are several options that might fit your needs. Some of them might be better than others, but all of them are used by small business owners just like you to access the capital they need. If you’ve been turned down by your banker, these options are a good place to start:

Bootstrapping—Most small businesses get off the ground this way and some operate successfully like this for years. It’s not the path to quick growth, but if you have a “slow and steady wins the race” mindset, the more organic feeling growth rate might be appealing.

Friends and Family—Asking one of your friends or a relative for money isn’t the first choice for most entrepreneurs, but it’s where most of them eventually find the capital they need. In fact, the success rate is better than grants, crowdfunding, credit cards, and other types of online and offline small business financing.

Vendor Financing—Your vendors want to see you succeed too. If you’ve been doing business with them for a while, have stayed current with your accounts payable, and they consider you a good customer, it’s not uncommon for a vendor to occasionally offer special terms. Some vendors will even set up a floor planning arrangement so you can stock inventory and pay for it as it sells.

Personal Credit Cards—Although this is a popular way to use credit, using your personal credit cards might not be a good idea. Credit card companies report to the credit bureaus at the time they invoice you. Even if you pay it off immediately, it’s the amount of credit you use compared to the amount of credit available that impacts your credit score. Using personal cards for business could actually hurt your personal credit score.

Business Credit Cards—It makes sense to use a business credit card for business, but it’s important to make sure they report your credit to the business bureaus, not the personal credit bureaus. Business cards also offer a number of tools to help you better account for your business expenses.

Crowdfunding—Crowdfunding is a relatively new way for small businesses to finance new products or even special projects. Basically, you mobilize a group of people to donate small amounts of money toward a common goal. In exchange, you offer them something of value—early access to new products, company swag, or in some cases even equity in your business.

Online Lenders—Online lenders don’t typically hold you to the same rigid credit criteria a traditional bank might, but you’ll need to have some business history to find success with an online lender. Most offer short-term and longer-term loans as well as lines of credit. OnDeck fits into this category. If you have a year in business and do at least $100K in annual revenues, it’s worth talking to us. Like the bank, we look at your personal credit score, but we don’t believe your credit score tells the whole story. We also look at dozens of other data points to evaluate your business.

Other Online Options—Factoring companies, merchant cash advance (MCA) providers, equipment financing, and other non-bank financial services companies also offer capital to small business owners. Not all of these companies are created equal though—some are better than others, so you’ll want to make sure you spend time researching before you jump in with both feet. Check out their reviews online, make sure they explain the terms to you in a way you can understand them. If they won’t, start looking for another lender.

It’s not easy to get turned down at the bank, but it’s not the end of the world. First, make sure you understand why. And second, make sure you look into all the options available to help you get the capital you need.

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