If you were denied a small business loan, it may be for a good reason. As we discussed in some of our previous posts including ‘Small Business Lending is Booming’; ‘4 Tips to Secure a Small Business Loan’; and more, it’s not always advisable to seek a small business loan if there are other things that need to be fixed first. So let’s figure out what those things are, shall we?
Not getting a small business loan isn’t the end of the world. However, there are times when you need a loan or alternative funding to fix certain problems. What should you do then? Well, there are a number of alternative lenders available to you. If you need to take this path to secure a small business loan or funding, you should take it with your eyes wide open. In other words, this is considered the high-risk lending market. High-risk equals higher rates, and generally, short-terms.
Banks are conservative. So, if you’ve been denied a small business loan, the lender considered you too risky. Being viewed as too risky doesn’t automatically mean that your business is in trouble, or you’re radioactive. This isn’t necessarily the time to despair.
“Nearly 20% of small businesses report being denied credit” – Kauffman Foundation
And those that get approval, don’t always get the amount they want.
“More than ½ of small businesses that applied for a loan under $250K in 2018 receive less than requested” – Federal Reserve
We have covered the reasons for denial in detail in previous posts, so there’s no need to rehash those here. But that shouldn’t keep you from trying to grow your business in other ways.
Even if your small business has been denied a loan, you may still have a good chance of obtaining funding from alternative lending sources without pain. These non-bank, online lending services offer alternative sources of funding with less strict requirements.
32% of applicants have turned to online lending in 2018, up from 24% in 2017 – Federal Reserve
The National Small Business Association has said that these lenders have played a significant role in providing capital to small businesses.
While traditional lenders require good credit scores, collateral, and business plans, alternative lenders are less like to deny a small business loan if these factors do not meet the traditional banking standards. They accept average credit and are less likely to need to see your financial statements. In fact, “54% of business with credit scores less than 700 are more likely to apply to an alternative lender”, according to the Federal Reserve.
While getting approved may be easier, the rates will almost certainly be higher. Plus, there are also additional fees attached. There is no simple way around it. It’s not necessarily bad, but you need to be aware of the impact that will have on the business. To put this into perspective, SBA loans or
Commercial loans have annual percentage rates (APRs) between 6% to 12% on average. In contrast, alternative lenders tend to range between 7% to over 100% depending on the risk profile. Did you say 100%? Yes.
While alternative lenders can be a lifesaver after being denied for a small business loan, just make sure it doesn’t turn into an anchor that sinks your business. Like any business decision, you have to weigh the cost vs. the benefit and go in with your eyes open. Dangerous financing early in business could cause massive problems down the line.
Crowdfunding and Peer to Peer can offer an alternative if you are denied a small business loan. They often offer lower rates than online lenders because the risk is distributed across a wider group. Crowdfunding & Peer to Peer lending is generally best for smaller, micro-loans. Why? You will need to do the heavy lifting. You need to build the campaign. Recruit people in your network to donate funds. Ensure you reach your target. The larger that number is, the harder that will be to achieve.
Note, we do not endorse or recommend any of the lenders on this list. We are sharing these for informational purposes only. We recommend you research any option thoroughly before taking any action.
Note, we do not endorse or recommend any of the lenders on this list. We are sharing these for informational purposes only. We recommend you research any option thoroughly before taking any action.
In summary, if you’ve been denied a small business loan, first, understand why. If you can solve that problem first, then do it. If not, then it depends on how much you need, and how much time and effort you can spend. Alternative lenders can be viable options, but you need to know what you are getting into before you take the leap. We help troubled businesses all the time, so if you want professional help in choosing what’s best for you, please contact us.
Brian Cairns, CEO of Prostrategix Consulting. Over 25 years of business experience as a corporate executive, entrepreneur, and small business owner. For more information, please visit my LinkedIn profile
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