We’ve all been taught that when you need a loan, you go to a bank. But what happens when a small business is turned down for a bank loan? While it can be a frustrating experience, getting turned down by a bank isn’t the end of your search for growth capital. In fact, your next step starts with just one question: “Why?”
The reason why your business wasn’t approved for a loan will give you a great idea of what is at the top of your to-do list.
“There are a number of reasons that small business owner might not be able to get financing from a bank,” says Zachary Petry, a loan officer with Bank of San Francisco, “but there is no reason that their search for capital should end.” Zachary shared three common reasons that a small business is turned down for financing – and we’ve included some next steps for each scenario:
The company doesn’t have historic profitability
Most banks look for historic profitability to ensure that a loan will be repaid. However, many small businesses applying for loans only show projected profitability. Luckily, there are many great lenders out there that don’t have as strict of policies around past profitability. Kassin Laverty, a small business owner who took a SAIL Loan last year, says, “SAIL was the right fit for us because while banks scrutinized our history, the SAIL team looked more at the potential in our business model.”
There are many sources of capital that might be right for your business. Using The FundWell’s widget is an easy first step to finding lenders that are a good fit for your business!
There are outstanding payments on the company or guarantor’s credit report that haven’t been addressed
Having a subpar credit report will likely be a red flag for any lender, whether it is a bank, a nonprofit or a microfinance institution. While it may be your first reaction to obtain a loan to pay off past debts, it is smart to first dig into your finances to find out where these unresolved problems started. By getting to know your business and personal financials better, you will have a clearer picture of where your money is going and why you have been unable to keep up with other payments. When you have this information, you will be able to clean up your credit and be a better candidate for a loan in the future.
Intimidated by digging into your financials? There are great small business resources out there that can help you figure it all out.
The funds are sometimes requested for covering current expenses rather than growing the business
Take a step back. Why are you looking for capital? Are you ready for growth or are you just trying to keep your business running as-is? Taking a strategic look at your business and coming up with a plan for sustainable growth should be at the top of your list as you start looking for capital elsewhere.
Need help getting your strategic plan in place or just looked at by an expert-level volunteer business advisor? Check out www.BusinessAdvising.org.
The moral of this small business funding story is to not give up. There are resources online and in your own community that can help you reach your business growth goal. It’s important to keep in mind that there are lots and lots of options for obtaining capital at all levels. If you’re looking to raise a relatively small sum of money (usually up to $5,000), a microloan via a lender like Kiva Zip might be the right fit. For slightly larger loans, many nonprofit organizations, such as Pacific Community Ventures, Opportunity Fund and Working Solutions, lend to small businesses that might not be ready for a bank loan. Additionally, personal crowdfunding sites like Kickstarter and Indiegogo allow small business owners to customize their loan amount and raise money amongst their friends, family and supporters.
In addition to the resources listed above, The FundWell is a wonderful place to start when you’re looking for the right loan for your small business. Consider all of these funding options a bridge that will eventually help you get that bank loan!
Zachary Petry is a Loan Officer at Bank of San Francisco, a small, locally owned community bank that focuses on relationship banking. Started 8 years ago, the Bank of San Francisco serves many different commercial clients, but the government guarantee loan department specializes in small business loans and lines of credit for growth, business acquisition, debt refinancing, equipment and inventory purchases, and working capital needs.