Feb 16, 2023

Why Your Bank Rejected Your Loan — and Why It Could Be a Good Thing for Your Business

Ernane Iung

Ernane Iung – President and Owner of ei Funding

When it comes to securing funding for your small or medium-sized business, it can sometimes feel like the odds are stacked against you. It’s not uncommon for small-business owners to face rejection when applying for a loan from their bank. While being rejected for a bank loan can be a frustrating and disheartening experience, it’s important to remember that it’s not your only option (or even your best one).

In fact, that rejection may be a redirection, pushing you toward alternative forms of funding that better fit the unique needs of your business. Alternative forms of funding can offer a more flexible and tailored solution for small businesses, providing access to the capital you need to grow and thrive, even after a loan rejection from a bank.

Understanding Why the Bank Rejected Your Loan Application

Illustration of a small business owner applying for a loan

It’s important to understand why your bank loan application was rejected so you can identify what kind of funding may be better suited to your business’s unique circumstances. Here are some common reasons your business may be ineligible for a bank loan:

  • Your credit history: Banks take the borrower’s credit history into consideration when evaluating loan applications. A low credit score or negative credit history can decrease the chances of loan approval. Additionally, banks often prefer to lend to established businesses with a proven track record, making it challenging for businesses without established credit to get approved for a traditional loan.
  • Insufficient collateral: Banks may require collateral for conventional loans as security. Your bank may reject your loan application if your business does not have enough assets to provide as collateral.
  • Insufficient revenue: Banks evaluate the borrower’s ability to repay the loan based on their income and cash flow. The bank may reject your loan application if it feels your business does not have enough revenue or a stable cash flow.
  • Overly aggressive growth plans: If your bank thinks that your business’s growth plans are unrealistic, they may not want to risk approving you for a loan at this time. Banks often evaluate the potential risks of lending based on a business’s past performance and future projections, and overly aggressive growth plans can often be seen as a sign of financial instability.

The Pitfalls of Relying on Bank Loans

illustration of a business owner discussing why the bank won't give her a loan

A loan rejection from a bank may feel like a setback, but it could be a valuable opportunity to explore alternative forms of funding. While traditional bank loans can seem like an obvious choice for small and medium-sized businesses seeking financing, they may not always be the best option.

In fact, relying solely on bank loans can present a number of challenges and limitations for businesses with unique funding needs. Here are a few reasons to consider alternative forms of funding which offer a more tailored and flexible solution:

Pitfall #1: Strict Eligibility Criteria

Banks have strict eligibility criteria that limit the number of small businesses that can qualify for a loan. Factors such as credit history, collateral, and revenue can all play a role in determining eligibility. Such criteria can contribute to why many businesses can’t get approved for a loan, posing a major hurdle especially for those just starting out.

Pitfall #2: Fixed Repayment Terms

Bank loans typically come with fixed repayment terms, which can be challenging for businesses that have fluctuations in their cash flow. Fixed repayment terms can lead to difficulty making repayments and potentially harm your business’s credit score. If your business experiences seasonal fluctuations in revenue or an unexpected event affects your sales, such as a natural disaster or an economic downturn, you may be unable to meet the strict repayment terms of a bank loan.

Pitfall #3: Lack of Flexibility

Bank loans can often come with strict terms and conditions, making it difficult for businesses to use the funds in the way they need. For example, the loan may have a fixed repayment schedule or require collateral, which may not align with your business’s cash flow or available assets, limiting the potential impact the loan can have on the business.

Pitfall #4: Lengthy Application Process

Applying for a bank loan can be time-consuming and complicated, requiring extensive documentation and a lengthy approval process. The wait time for loan approval can take weeks or even months, which can strain your business’s finances and limit its ability to grow and thrive. These long waiting periods can be particularly challenging for businesses that need access to cash quickly to fund their daily operations or pursue new opportunities on a tight deadline.

Frequently Asked Questions About Bank Loan Denials

1. What are the most common loan denial reasons for small businesses?

Loan denial can often occur due to insufficient credit history, lack of collateral, inadequate cash flow or overly ambitious growth plans. Understanding these common reasons can help you better prepare your future loan applications or explore alternative funding options.

2. What is most likely to cause a lender to deny credit to my business?

The most likely reasons for credit denial include a low credit score, insufficient revenue, high debt-to-income ratio or the unstable economic condition of your business sector. Ensuring your business’s financial health and having a solid plan can improve your chances.

3. Why can’t I get approved for a loan even with a good business plan?

Even with a good business plan, loan approval can be elusive due to factors like your business’s or personal credit history, the amount of existing debt you have or the lender’s assessment of your industry’s risk. It’s also possible that your plan might not meet the specific criteria or risk appetite of the lender.

4. What should I do if I can’t get approved for a loan?

If you can’t get approved for a loan, consider revisiting your business plan and financial projections to address any weak spots. Also, explore alternative funding options like invoice factoring, microloans or business lines of credit that might have more flexible approval criteria.

Your Funding Alternative: Invoice Factoring

Invoice factoring is a quicker and more streamlined alternative to traditional bank loans, allowing small businesses to boost their cash flow without weeks or months of waiting. With invoice factoring, businesses can receive funding in as little as 24 hours based on their outstanding invoices. This quick turnaround makes factoring an excellent option for businesses that need to quickly access the capital to fund payroll, inventory and cover bills. Unlike bank loans, invoice factoring is a flexible and streamlined solution that can provide the capital businesses need to grow and thrive.

Illustration of happy business owners who use alternatives to bank loans

Discover More Funding Alternatives to Keep Your Business Growing

If you’re ready to explore even more alternative forms of funding for your business, check out our free downloadable guide: 5 Foolproof Alternatives to Bank Loans.

This guide offers valuable insights that can help you determine which form of funding could benefit your business the most, helping you make informed decisions about your business’s financial future and find the right funding solution for you.

Don’t let loan rejection be the end of the road for your small business — take control of your financial future and explore alternative funding forms today.

Learn More


About the author

Related Blogs