If you’re trying to start a small business, you’re going to need funding. Most businesses will need some sort of loan for start-up costs and business capital – getting a new company off the ground isn’t cheap!
If you’re making strides at getting your business up and running, then finding out that you’ve been turned down for a loan can really throw a wrench in your entrepreneurial plans. This is indisputably discouraging, but it doesn’t mean you need to give up on your dreams of owning your own business. Don’t worry – you’re not the only entrepreneur who has faced this issue.
Multiple reasons exist for why you may not get offered a loan. The most common reason for why turn entrepreneurs get turned down for loans is poor credit. Other common causes include poor cash flow, lack of collateral, and high debt-to-income ratio. Over time, you’ll be able to overcome those problems and build a stronger credit portfolio. But what about right now?
In the meantime, you still have a business to run and no loan available to do so. What’s next? First, take a moment to carefully reevaluate your business plan. Sometimes, getting denied for a loan is a signal that there’s a flaw in your plan. Go through it all again, check all of your assumptions, and make sure that your plan makes sense. Make changes if necessary. Then, talk to your loan officer. Ask about what parts of your application were weak. Talk about your business plan and what you can do to make it stronger. You may find that it’s simply low personal credit or lack of collateral and there’s no way around it in the short term. That’s ok – you still have plenty of other options.
Check Out Other Types Of Lenders
Traditional lenders aren’t the only source of loans – there are other places you can go to borrow what you need.
Microlenders like Accion are non-profit entities that issue small loans, usually in the range of $500 to $50,000, for small businesses that may not qualify for traditional lending. Microlenders may provide attractive financing options for you if you’ve been turned down for a traditional loan, since they generally place less emphasis on stellar credit scores and more on personal business goals and plans.
Microloans may offer additional benefits for your small business, including:
- Reporting to the credit bureaus so you can boost your score
- Offering educational and financial resources to help you run your business
- More favorable APRs than other alternative lenders (although rates may be higher than a traditional lender)
For more information on available microloans for which your business may qualify, explore the resources available at Association for Enterprise Opportunity.
For detailed application information, including details and contract information, review the materials available at us.accion.org.
2. Short-Term Loans
These loans may be used to cover a very brief cash shortage, but they can be dangerous – they often have very high interest rates and can leave you stuck in a revolving door of debt.
Payday loans are the most familiar type, in which you agree to pay back the loan with your next paycheck. These loans often come with big fees and very high interest rates, meaning you’ll have to pay back far more than you borrowed. If you can’t make that next payment, the fees and interest continue to accumulate. Note that payday lending is illegal in some states.
Cash flow loans allow you to borrow against your business’s projected future income. The lender will examine your business plan and your sales and income to determine how much you can borrow and what your rate will be. Like other short-term loans, the interest rates are typically high and you may run into cash flow trouble down the road as you use your earnings to pay the loan.
3. Peer-To-Peer Loans
Peer-to-peer (P2P) lending is a relatively new funding option. It connects businesses with those in need of financial assistance through an online platform. Borrowers are charged an initial fee to participate and investors may be required to pay a service fee as well. Instead of loans going through banks, peer-to-peer lending allows people to loan money to individuals or businesses they believe in. Because P2P services don’t have high overhead, they can often offer both a lower interest rate to borrowers and a higher rate of return to lenders.
For more information on alternative lenders, check out our in-depth discussion at the Alternative Lending Landscape.
Find Other Ways To Get Cash
Alternative lenders aren’t the only way to handle your financing, either. You may be able to beef up your loan application and re-apply for a traditional loan. For example, you can:
1. Take on a partner.
A business partner can buy into the business and fund some start-up costs. In exchange for cash, they’ll own a part of the business. One thing to keep in mind is the implication that such investments would have regarding control of the business. Make sure you have a clear partnership arrangement spelled out before you jump in with both feet. It’s often worth the cost of bringing in an attorney to hash out the details of the partnership agreement and make sure everyone is clear on the terms. Also, consider your partner carefully – you’re potentially going to be working with that person for an extended period of time.
2. Consider a co-signer.
Having a partner (or even a family member) with good credit cosign on your loan can buffer a less-than-stellar credit score. Just as with a business partnership, make sure the terms on the cosigner relationship are clear to both parties. When someone cosigns your loan, they take on responsibility for that loan if you can’t or don’t pay. That’s a big deal, so make sure that they fully understand and accept the terms – you don’t want to end up with a lien on your parents’ home because they cosigned and you missed a payment.
3. Borrow from friends or family.
If you have relatives who wish to provide an initial investment into your business, then this is an option to explore. Your family and friends may be willing to help you out where a traditional bank wouldn’t, since they know more about you than a credit report can show. However, just because they’re close to you doesn’t mean this loan or investment should be handled casually. Treat them like you would any other investor. Show them your business plan, explain what you’re asking for, and give them fair terms for repayment. Put it all down on paper and make it official. Your family and friends will appreciate the fair and formal treatment.
4. Seek funding from vendors or suppliers.
If cash flow is tight and your business is already up and running, then existing vendors with whom you have a good relationship can be sources of credit. Ask about a line of credit with your current vendors and contractors. If you pay them in a timely fashion, you can boost your credit score, which can help you take out other loans in the future. Remember that they’re trusting you, so it’s important to only borrow as much as you can handle and pay it back in full and on time, every time. That said, they might be more understanding than a bank would about a tough month, so keep in close touch with them about your line of credit and any issues that might come up.
Credit Is The Bottom Line
One of the most important factors to quality for a loan is your credit history. The harsh reality is that if you have poor credit or an inadequate credit history, it will be difficult for you to get approved for a traditional bank loan.
But don’t let getting a traditional loan denied discourage you! It just means that it’s time to start looking for other ways to get the cash you need to keep your business running and growing. As you utilize these other options (and make sure to pay on time and in full), your credit will grow on its own and your credit report will get stronger and stronger. This will open up opportunities for more financing in the future! You can also check out our article “How to Build My Credit” for other tips on how to boost your credit score.
Dealing with a negative credit history can take some time, so while you should certainly address any poor marks on your credit, you may need to pursue other lending options in the meantime.
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