Alternatives After Being Rejected for a Business Loan

By Logan Allec is a CPA, personal finance expert, and founder of the finance blog Money Done Right 

Business loans are often a great way to invest in your company, but the truth is that rejection is a real possibility. Even if you’re expecting to be approved for an upcoming business loan, you should have an idea of your other options if things don’t go as planned.

This article will cover some of the most effective business finance options to look into if you’re rejected for a business loan. Keep in mind that the right choice is different for each business—there’s no one best strategy for small business growth.

Why Didn’t I Qualify?

Rejection can be a frustrating obstacle when you’re trying to expand your company, but being rejected a single time doesn’t mean you can’t try again. Instead, try to use this as an opportunity to evaluate the current state of your business and look for ways to improve.

Businesses can be rejected for a variety of reasons, but lenders typically use a few basic criteria to determine whether you’re creditworthy. These are a few of the most important factors that could explain your rejection.

Credit Scores

As with any other form of credit, your personal credit score has a significant impact on your ability to qualify for business loans. Experian considers anything above 700 to be a good credit score, while scores of at least 800 are excellent.

You may have trouble finding business loans if your personal credit score is under 700, and improving your credit will help you get lower interest rates. You can raise your credit score by paying bills on time, limiting credit utilization, and increasing the average age of your accounts.

In addition to your personal credit score, your company’s business credit score is another critical factor. Unlike personal credit scores, business credit scores only range from 0 to 100. Different lenders weigh these scores and other criteria differently, so make sure to file multiple applications.

Business Age

It’s often difficult to qualify for loans over the first year or two of your business, so simply waiting another year could make your application more attractive. More businesses fail in their first year than at any other time, so overcoming early difficulties shows that your company has a future.

The majority of traditional banks and other lenders are unlikely to approve your loan application during your first two years. That said, you may be able to qualify for other types of financing if you can’t afford to wait.

Alternatives to Business Loans

If you’ve been rejected for a business loan, you’re probably wondering about the next steps for your company. These alternatives to business loans offer a number of benefits that may make them even better choices for some businesses.

Invoice Financing

Invoice financing is one of the easiest ways to improve cash flow, and they aren’t as dependent on your credit history as business loans or other financing options. Rather than borrowing money on credit, you’ll be paid upfront in exchange for the right to collect outstanding invoices.

Customers don’t always pay on time, and waiting for payment can slow down operations for growing businesses. Invoice factoring offers relatively low interest rates compared to most forms of credit, and you won’t have to take on debt or pay anything back. With that in mind, invoice factoring is arguably the most cost-effective alternative to business loans.

Business Lines of Credit

While business loans work similarly to personal loans, business lines of credit are more like personal credit cards. In contrast to personal loans which only offer a set amount of credit, you can continue to use more credit once you’ve paid back the existing balance.

Business lines of credit sometimes offer lower base interest rates than conventional term loans, but your interest rate could also increase if you miss a due date. They’re perfect for short-term credit if you know you’ll be able to pay the balance off quickly.

On the other hand, business lines of credit involve the same risks of all other credit cards. Debts grow quickly if you let them accumulate, and your future cash flow can be difficult to predict. Furthermore, you won’t be able to use credit in an emergency if you have an outstanding balance.

Merchant Cash Advances

Like invoice factoring, merchant cash advances are technically distinct from loans. Lenders offer a given amount of cash upfront for a set percentage of credit and debit card sales. Most merchant cash advances also charge a financing fee.

Merchant cash advances generally provide higher costs than other forms of business financing, and they have an ongoing impact on your cash flow. That said, they’re also available to businesses with bad credit, so they’re usually more accessible than business loans.

You should look for another way to access financing if possible, but merchant cash advances aren’t a bad choice if you’re having trouble qualifying for more affordable options. You could receive funds in as little as one business day, so they’re perfect for situations in which you need money quickly.

Business loans are undoubtedly one of the best ways to add cash flow and reinvest in your company, but being rejected for a business loan isn’t the end of the world. Keep these ideas in mind after rejection to improve your loan application and look for other options.