The vast majority of businesses require external funding so they can operate effectively, maintain a healthy level of cash flow and take advantage of new opportunities that come along.
The first port of call for most businesses is the bank and the mainstream commercial lenders, which provide a range of potential funding streams including small business loans.
The trouble for some businesses is that they may not necessarily fit the typical borrower profile those lenders are looking for, which could lead to your application being refused.
Although being refused a business loan might seem like an obstacle that’s difficult to overcome, there are plenty of other funding options available to you.
Why Can’t I get a Business Loan?
There are numerous reasons why your business loan application might be refused. Some of the most common reasons are listed below. However, everything from operating in an industry that’s considered too risky to not asking for enough money could influence the lender’s decision.
A Poor Credit Rating
If you run an established business, a commercial lender will always look into your financial background and borrowing history to assess the level of risk you present. If they find the business has previous defaults or a court order such as a county court judgement (CCJ) on its creditor record, it will increase the likelihood of your application being refused.
A lender is more likely to agree to your funding request if the business loan is secured, usually against a business asset. In the event that the company defaults on the agreement, the lender will be able to repossess and sell the asset to recover the value of the loan. If the company does not have assets that can be used as collateral, the lender may ask for security in the form of a personal guarantee. In that instance, if the company cannot repay the loan, the lender can pursue the director for the funds.
Although signing a personal guarantee may help you to secure a business loan, it is not something you should do lightly. If the business becomes insolvent and is unable to repay the loan, the consequences for you personally can be extremely damaging.
Insufficient trading history
Many lenders want companies to have a track record of healthy revenues and a certain amount of experience in their industry before they grant them a loan. Most business lenders like to see at least one year of trading history, but specialist startup lenders will overlook a trading history and make their decisions based on other factors.
A bad personal credit score
If you are applying for a loan for a limited company, your business will have a credit score of its own. However, that doesn’t stop lenders from checking the personal credit records of the company’s directors. If the lender finds adverse events on your credit file that it believes will increase the risk, it could refuse your loan application altogether or reduce the amount it is willing to lend.
“Bad Credit Business Loans Guaranteed Approval’
Just because you have been rejected for a business loan by a lender, it doesn’t mean that you won’t be able to find one elsewhere. Every lender has their own set of lending requirements. While the banks tend to be risk-averse in their approach, commercial lenders may be willing to accept different business types with a range of risk profiles.
For example, while one lender might prioritise established businesses with excellent credit records and a long trading history, others may specialise in lending to startups or very small businesses that have excellent prospects but are still in the very early stages of their journey. Finding a lender that’s the right fit for your business is central to getting your loan application approved.
That said, use caution if you’re tempted to click on advertisements which offer “bad credit business loans with guaranteed approval.” These types of lenders will balance their risk with higher fees and you may find yourself regretting your decision down the line.
What Other Types of Business Funding Should You Consider?
Commercial finance comes in different shapes and sizes and just because a business loan might not be appropriate for your business, it doesn’t mean there aren’t other funding options that are. The right funding option for your company will depend on a range of factors:
- How much you need to borrow
- How long you have to pay it back
- How quickly you can access the funds
- Whether security is required
- The cost of the finance
- The purpose of the capital
- The size of the company and its ability to borrow
- The company’s profits and reserves
Here are a few are tried and tested alternative finance options that you should consider:
Invoice finance isn’t a new form of business funding but an influx of competition and a better range of deals has made it increasingly mainstream. Invoice finance uses the invoices the business issues to its customers as security for funding. The finance provider releases 80-95 percent of the value of the invoice to the business as soon as the invoice is sent to the customer. The finance provider then collects the payment from the customer when it is due and pays the balance to the business, minus a typical fee or around 2-3 percent.
If your company is struggling to maintain a healthy level of cash-flow, invoice finance could be the answer. Rather than having to wait for 30, 60 or even 120 days for an invoice to be paid, you receive the money within 24 hours so you can run and grow your business.
Asset-based lending is a form of finance that uses the assets on your balance as security for lending. That can include physical assets such as stock, equipment, machinery and property, but also intangible assets such as intellectual property and the company’s debtors, as is the case in invoice finance.
This form of lending uses the value tied up in assets that would not normally be considered by banks and other traditional lenders. It is very flexible, with few restrictions on what the funds can be used for, and agreement lengths and repayments can be negotiated to meet the particular needs of your business.
Merchant cash advances
This relatively new form of lending is becoming an increasingly popular finance option for companies that use card terminals, such as retailers and leisure facilities. Merchant cash advances allow companies to access up to a month’s worth of turnover, with regular repayments made as a percentage of each card terminal transaction until the full amount has been repaid.
Like invoice finance, merchant cash advances allow companies to boost their cash flow over the short-term so they can run the business effectively and invest in growth. This line of credit is also relatively easy to access, as lenders do not tend to run credit checks or examine the business’s accounts. Instead, they can simply check the borrower’s volume of card payments with the terminal provider.
Business credit cards
A business credit card works in a very similar way to your personal credit card. You will receive a maximum credit limit based on your company’s creditworthiness and most lenders will offer an interest-free period, so you only pay interest on the outstanding amount after a period that’s typically 45 days.
Business credit cards can be a useful way of accessing additional funds when needed. They can be convenient for managing cash flow and keeping track of your expenses. However, as an unsecured form of lending, the eligibility criteria can be quite strict and borrowing limits tend to be low. Like all unsecured lenders, business credit card providers will look at your business’s trading history, credit rating, turnover and profit when deciding whether to approve your application.
If your business is asset-rich but cash-poor, asset refinancing could be an effective way to access a cash lump sum to boost your working capital or to invest in new machinery, vehicles or equipment.
Sometimes called a sale and leaseback agreement, the lender will establish how much equity you have in the asset and pay a percentage of that figure as a lump sum. The amount the lender will be willing to advance will depend on the asset’s age and condition. The agreement will typically last between one and five years, and at the end of the arrangement, ownership will usually transfer back to your business.
Business Finance When You Can’t Get a Bank Loan
If you can’t get a bank loan, there are several other forms of business finance out there that could provide the injection of cash you need. However, while it’s good to know you have options, you must take the time to choose a product that meets your needs now and is also a good fit for the long-term objectives of your company.
For example, if your company is seasonal and is currently short on cash, a long-term loan that you’ll be repaying long after the need for funding has passed could potentially do more harm than good. Similarly, if you want to invest in a new asset, a business credit card is unlikely to provide the level of funding you need at an affordable rate over the longer-term.
Factors to consider when choosing an appropriate source of funding for your business include:
- The repayment term – Longer agreements can lead to significant interest payments over time, while shorter-term finance deals may require larger periodic payments.
- Interest and fee structures – Make sure you’re aware of all of the costs associated with each financing method and calculate the total cost of borrowing before you apply.
- The lender’s requirements – There’s no point pursuing a particular funding option if you’re unlikely to be eligible. Only spend your time on those that have requirements you meet in full.
- Your goals – How much capital do you need to raise and why? Finding a lending stream that provides the level of finance you require over an appropriate term will help you achieve your goals.
- The requirement to provide security – Many funding options will require security, whether it’s in the form of business invoices, company assets or a personal guarantee. Consider the requirement to give security very carefully and make sure you understand exactly what the consequences will be if the business cannot make the payments.
Talk to a Business Finance Specialist
An experienced business funding professional will be able to provide targeted advice and understand exactly what funding type best suits the circumstances of your business. At Company Debt, we can help you explore your business finance options, whether you’ve been turned down for a loan or want to know whether there could be a better option out there for you. Get in touch for a free, no-obligation consultation with our team.