What to do if you can't get a business loan

Many start-up owners rely on external funding to kick-start their businesses.

Applying for a business loan from banks and other traditional lenders is often the first step.

But sometimes, access to funding can be more challenging than you might expect.

As a new business owner, several factors could work against you, potentially resulting in the rejection of your application.

But remember, not getting a business loan doesn’t have to mean the end of your start-up journey.

Read on and discover what steps you could take if you can’t get a business loan.

Why can’t I get a business loan?

Your business loan application might be turned down for one or more reasons.

Some of the most common could include:

Poor credit score

Lenders usually check credit scores to assess the creditworthiness of applicants.

A low score could signal past financial issues, affecting your chances of approval.

Past financial issues can be particularly challenging for start-ups, where personal credit is often examined due to the lack of business credit history.

Read our guide to applying for a business loan with bad credit.

Lack of credit history

Not having any credit history can also be an issue.

Lenders use credit history to assess the risk of lending money.

They can’t judge how well you handle debt without a record of borrowing and repayment.

This lack of data might result in your loan application being rejected, or you might get approved, but with a higher interest rate or for a smaller sum than you originally asked for.

Insufficient annual turnover

Many lenders require a minimum annual turnover to qualify for a business loan.

Start-ups may not meet these financial benchmarks, especially in their initial stages.

Lenders could consider sufficient turnover as evidence of a business’s capability to generate revenue and repay the loan.

Incomplete documentation

Applying for a business loan requires thorough documentation, including business plans and financial statements.

Incomplete paperwork could delay or lead to a rejection of your application.

Proper documentation is crucial for evaluating your business’s potential success and readiness for a loan.

Read our comprehensive guide on the documents you need to apply for a business loan.

Insufficient collateral

Start-up entrepreneurs can sometimes struggle to secure loans due to insufficient collateral.

This typically needs to be equal to or greater than the loan’s value, although the exact requirements vary between lenders.

Lenders typically prefer tangible assets to mitigate risk, and new businesses may not have these.

This could lead to the rejection of your loan application or the offering of less favourable terms for a loan.

Limited trading history

Lenders may prefer businesses with a proven track record.

Start-ups, by nature, may have a limited trading history, which could make lenders hesitant.

A longer trading history gives lenders insights into a business’s stability and performance trends, potentially reducing the perceived risk.

Too much debt

Existing debt levels could deter lenders from approving new loans.

A higher-than-desired level of debt could indicate that you are already over-leveraged, raising the risk of default on new loans.

Lenders typically assess the debt-to-income ratio to determine if a business can handle more debt; excessive liabilities could be a major obstacle.

Even if your business loan application was rejected for these or other reasons, it doesn’t mean you can’t secure one in the future.

It also doesn’t prevent you from securing other types of financial support for your start-up.

Other types of finance start-ups could look for

Here are ten alternative start-up funding options you might consider.

1. Personal savings

Many entrepreneurs use their own savings to fund their new business.

This option allows for complete control without the pressure of loan repayments.

However, it could carry the risk of personal financial loss if the business fails.

2. A loan from family or friends

Borrowing from family and friends could quickly secure funding without formal applications or high interest rates.

Establishing and documenting clear repayment terms may help prevent relationship strains.

3. A Start Up Loan

You might also consider applying for a Start Up Loan, a government-backed personal loan for people looking to start or grow a business in the UK.

You can apply for up to £25,000 and benefit from a full year of free mentoring, which can be invaluable for a start-up entrepreneur.

4. Credit cards

Business credit cards could offer a flexible and immediate source of funds.

They could be ideal for managing cash flow and covering short-term expenses.

However, high interest rates could lead to significant debt if your finances are not managed carefully.

5. Crowdfunding

Platforms like Kickstarter and Indiegogo help entrepreneurs raise funds from many small investors.

This approach not only helps start-up owners secure funding but could also raise awareness and PR for your products or services, thanks to the public interest generated.

6. Angel investors

Angel investors provide capital for start-ups in exchange for equity.

In addition, they may offer valuable business advice and industry connections.

7. Venture capital

Venture capital firms invest in start-ups with high growth potential in exchange for equity.

While this could provide substantial funding and resources, it might require giving up a significant portion of control over your business decisions.

8. Business grants

Grants from government bodies or private organisations provide funds to businesses that may not need to be repaid, depending on the grant conditions.

These are typically highly competitive and require detailed applications demonstrating the business’s potential impact on its industry, so a positive outcome is not guaranteed.

Discover government grants for start-ups.

9. Peer-to-peer lending

Platforms like Funding Circle connect businesses with individual private lenders.

Peer-to-peer lending offers a more flexible lending process than traditional banks.

However, terms and conditions could include varying interest rates and terms based on the business’s perceived risk.

10. Incubators and accelerators

Business incubators and accelerators are programmes that provide mentorship, resources, and sometimes financial support to start-ups.

They offer a supportive environment encouraging growth and networking, which can be incredibly valuable for early-stage businesses.

Some will offer initial seed funding to help start-ups launch their ventures in exchange for equity or fees.
Others may provide grants or low-interest loans.

These alternative funding options could provide your start-up with various avenues to explore.

You might be able to secure the capital you need while offering flexibility and varying levels of support and control.

Selecting the right funding options for your start-up depends on your business model, growth stage, and financial needs, so you may wish to consult with a financial expert to find the best fit.

Read our complete guide to the best business funding alternatives.

How to boost your business loan application chances

You might consider building a strong financial foundation to improve your chances of securing a business loan.

Here are some ideas that could help you strengthen your start-up.

Open a business bank account

Separating personal and business finances simplifies bookkeeping and provides a clear financial history for lenders.

Maintain good bookkeeping

Accurate financial records could help demonstrate financial responsibility.

You may want to use accounting software to track your income, expenses, and cash flow.

This could make it easier to present financial statements during loan applications.

Discover our small business bookkeeping tips for success.

Improve credit rating

You could build a strong credit history by paying bills on time and reducing debts.

You might also consider responsibly using a business credit card to establish credit in the company’s name.

Develop a solid business plan

A well-researched business plan with clear financial projections could instil lender confidence in your start-up’s potential for success and growth.

Learn more about business plans.

Build relationships with lenders

You might consider engaging with local banks and credit unions early in your start-up journey.

Establishing a relationship could make future loan applications smoother as lenders become familiar with your business.

Monitor cash flow

Effective cash flow management could help your business meet its financial obligations, showing lenders you can handle loan repayments.

Implementing these practices could significantly enhance your start-up’s financial stability.

This could increase the likelihood of loan approval when you’re looking to fund your growth.