A woman sits at a table and looks at a piece of paper with a worried look. She has one hand to the side of her neck.
If your business's loan is rejected, you'll receive a letter or other notification from your bank saying so. But don't despair! There are other avenues you can pursue for funding. — Getty Images/fizkes

Owning and running a business is full of ups and downs — and securing financing can be either one. Many startups try to apply for a loan through their bank to get funding to start or grow their business. However, things don’t always go quite as planned, especially for early-stage companies without a solid track record under their belt.

If you apply for a loan but get denied, there are other options you can pursue to get the funding you need. Here are three things to do after your business loan gets rejected.

Find out why your business loan application was rejected

There are a variety of reasons why a bank may reject a business loan. New entrepreneurs are often rejected for a business loan because they have not spent enough time in the business space. Those who do not have a proven track record in business can increase their chance of getting approved by putting up collateral to reduce the lender’s risk, or working through the Small Business Administration’s loan program to see if the SBA will guarantee your loan through one of its lender partners.

Another reason your business loan might get rejected is that you don't have enough free capital or cash flow to meet loan repayments. Lenders want to see an organized business plan that clearly states how you'll earn money and make regular, timely payments. If they don’t believe that your plan will give you a sufficient amount of income to pay back the loan, they’ll likely reject your application.

Finally, a lender may reject a loan application if the applicant has a poor credit rating. Both your personal and business credit score may affect your ability to get approved for a business loan. Your credit score reflects how much debt you've acquired and how efficiently you are paying it off. Like any lender, banks offering a business loan typically consider it risky to lend to someone with a history of late payments or large amounts of existing debt.

[Read more: How to Apply for a Small Business Loan for Your Startup]

New entrepreneurs are often rejected for a business loan because they have not spent enough time in the business space.

Work on improving your finances

If your loan application is rejected, you'll often receive a letter or other written notification explaining why you were not approved. If you are not given specific reasoning, you can contact the lender to ask why they rejected your application, then use that information to improve your finances before you reapply.

If your loan was rejected because your credit score is either too low or your business does not have one, there are a few ways to boost it. Start by managing the amount of debt you've accumulated and make monthly payments on time. You don't need to pay off all your debts in order to get approved for a loan, just show that you are consistently making on-time payments and avoiding delayed payments.

You can also increase your personal and business assets in order to match the collateral that the lender is asking for. If your assets have greater value, your business will be more likely to be approved for a loan. With high-value assets, you'll be able to put up more collateral for your loan.

[Read more: 6 Popular Financing Options for Your Startup]

Seek alternative lenders

Alternative lenders are institutions that do not have a full banking license but can offer different financing options to smaller businesses. These include direct online lenders, private lenders, and marketplace lenders.

One type of online loan is a short-term loan. This is a loan that has a smaller time frame for repayment than standard-term loans. Typically, that time frame is within a few months and no more than a full calendar year.

Another type of alternative lending is a peer-to-peer (P2P) loan. Through an online platform, the borrower, investor, and partner bank link together to leverage an applicant's metrics and provide them with a loan.

Businesses that do not have any credit history can apply for a business credit card to increase their credit score. Your business can use the credit card for purchases you know you'll be able to pay back, and thus not overextend your credit. This practice also builds good credit history for the next time you apply for a traditional business loan.

Not sure if a business loan is the right approach for you? Check out these financing strategies for every stage of your business’s growth.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published May 23, 2022