Denied a Business Loan? Here’s What to Do Next

Updated on: 14 Dec 2023 // 5 min read // Business Loans
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You started a business a few years ago; you were doing well until GST (Goods and Services Tax) came into the picture and now suddenly, your business took a flip. GST’s implementation affected your business badly as your vendors were not tax-compliant and so were you consequently. Now your business is suffering from financial downfalls because your vendors and you are stuck organizing transactions so that your business can keep going.

Such situations may arise anytime without due notice. Small business owners are the one who suffers most during such situations. What can you do at such critical moments?

Apply for a business loan online or offline to cope up with a financial loss or downfalls!

But, what if your business loan application is rejected by the Lenders?

Yes! That may happen due to several reasons.

Watching your once-successfully growing small business shatter just because some problems cropped up and you were not able to tackle it financially could be extremely depressing as an entrepreneur. You might feel devastated due to rejection and perplexed about “what to do next and whether your big business plans will come true or not?”

If you’ve been denied a Business Loan, worry not; don’t let it stop you from pursuing your business goals.

Here’s what to do next to ensure that your Business Loan application doesn’t get rejected in the next attempt:

Ask Lenders the Reasons for Your Business Loan Rejection

If lenders give your application a red stamp signifying denial, it’s next to impossible to change their decision. However, what they can do is provide an explanation letter explaining the reasons for rejection.

So, if you want to know why your Business Loan application could not meet their requirement, ask lenders for providing the letter of explanation.

That way, you will be able to understand why you have been denied a loan. This will help you make the required changes to result in success when you re-apply for a loan in the future.

Check Your Credit Reports – Business and Personal Both

Have you ever bought a house or car? Have you ever applied for any loan? If yes, you would be familiar with your personal credit score and its impact on your financial access. As a business owner, you should always be aware of your personal as well as business credit scores. Your personal credit score is equally important for small business loan approval.

When you have been denied a business loan, make sure you analyze your personal credit history. Check your score for errors (if any) that may have lead to the rejection.

Also, make sure that you check your credit score with all the major reporting agencies – CIBIL, TransUnion, Experian, and Equifax. That is because different bureaus may interpret your report differently and your credit information may vary. If you find any error(s) in your report, contact the concerned agency and get it corrected immediately.

Try Improving the Financial Standing of Your Business

It’s important to improve financials of your business such as cash flow, annual revenue, business savings, etc. These factors play an important role when lenders check your eligibility for business loan.

Lenders use your debt service coverage ratio (DSCR) to determine if your business has required cash flow or not to make consistent and timely loan payment.

Here’s the formula for calculating DSCR:  

DSCR = Net Operating Income

                 Total Annual Debt

A DSCR of less than 1 means your business’s debt can exceed available cash flow. This can result in loan rejection. Your DSCR should be 1.25 or higher for getting loan approval.

Consider Other Alternatives Too

Rejection from one lender doesn’t mean you will hear “NO” from all. Different banks have different standards and requirements for different loan products. Some lenders may provide you lesser than required loan amount or some may charge you higher interest on loan if your credit history is not so good.

Be Careful in Your Next Approach

Be careful with your next approach! Know lender’s eligibility criteria, keep your documents ready (personal and business), check your credit score for any errors, fill application form accurately and don’t hide any facts from lenders. Make sure you don’t commit any mistake in the second attempt that you made earlier. Getting denial once doesn’t mean your application will be rejected in every attempt.

Also, know the reasons why your loan was rejected.

Here are some reasons that could be behind your loan denial:

1. Not Knowing Credit Score

This is one of the most common reasons why a Business Loan is denied. If you’re aware of your credit score before applying for a loan, you will know if you have poor credit or no credit at all. You can then build or repair your credit by following some steps.

2. Not Having Enough Cash Flow

To check your creditworthiness and repayment capacity, lenders analyze your cash flow. Having enough cash flow means you can repay the loan in time whereas inadequate cash flow can impact your loan eligibility.

3. Being a Startup

Not every bank or financial institution provides loans to startups. It is better to avail Secured Business Loan such as a loan against property if you have collateral (such as property). Lenders usually see track record of the business, healthy revenues, and experience in the market before providing financial support.

If you own an early-stage startup, you may look upto other alternative sources like online lenders, crowdfunding, grants, SME loans by the government, etc.

4. You are Already Debt-Ridden

Is your business already buried in huge debt of other loans? If yes, you are at high risk of getting loan rejection from lenders. They are likely to be hesitant in extending additional credit to someone who is already debt-ridden. Make sure you repay your loans consistently and timely.

5. Not Having a Feasible Business Plan

If you apply for a business loan, be prepared with a solid business plan. Most investors don’t consider loan application without a feasible business plan. Make sure you have a thorough business plan that could prove you have conducted research and that you know your market and customers well.

6. You’re Not Clear about the Purpose of Seeking a Loan

Do you need a loan to purchase an office space? Are you planning to expand your business to a new city? Do you want to buy an equipment to increase business productivity? Do you need money for marketing and promoting your products so that they can yield better sales?

You must be clear about the purpose of availing Business Financing and that purpose shall sound great. Lenders are not going to lend money to your business for vague reasons. They want to ensure that their money will be used for your business growth so that you can repay your loan timely.

Keeping the reasons for business loan rejection and steps to be taken afterward can prove to be helpful when you make the next attempt for a loan.