What to do if a bank turns you down for a business loan

Experiencing a business loan rejection can be disheartening for any business owner and can leave you wondering how you’re going to finance your business’ activities.

However, it's not the end of the road and there are lots of funding options out there to support smaller businesses.

In this article, we’ll help you understand why a business loan application may be rejected, some of the alternative lenders available to smaller businesses, and outline some of the alternative finance options to traditional bank loans. 

As with all financial products, it’s a good idea to seek independent, specialist advice to determine which product is right for you and your business.

Reasons why you may be refused a business loan

Upon facing a loan refusal, gaining insight into the reasons behind the denial is crucial. 

A low credit rating, lack of collateral, a weak business plan, or poor cash flow predictions could be the culprits. 

Understanding the lender's reasons for refusal enables you to make the necessary enhancements to your future applications.

A low credit score, for example, often leads to a loan refusal as it signals a higher risk of defaulting on the loan. 

By regularly checking and improving your credit score, you can bolster your chances of loan approval. 

Also, it's vital to ask for feedback from your lender post-refusal. 

This feedback can spotlight the areas in your application that need refinement and provide useful guidance for your next application.

Options if you’ve been refused a business loan

If your business has had an application for a business loan turned down by a lender there are a few options you can consider if you are sure a business loan is right for you:

Bank Referral Scheme

Depending on which bank you applied for your business loan with, you may be able to make use of the Bank Referral Scheme.

Introduced in November 2016, the Bank Referral Scheme was created to streamline the process a small or medium-sized business goes through to access finance. 

Research indicates that businesses often seek financial assistance from their primary bank. 

However, if their business loan application is rejected, many businesses stop their search for funding, potentially missing out on opportunities to secure the capital they need.

The Bank Referral Scheme addresses this issue by requiring high street banks, upon rejecting a finance application from a business, to offer that business a referral to an online finance platform. 

These platforms connect businesses, which may not fit the traditional risk profiles of big banks, with alternative finance providers capable of offering the necessary funds for growth and development.

Through this initiative, the Bank Referral Scheme aims to support viable businesses in finding the financial solutions they need to grow, ensuring that a business loan rejection from a high street bank does not bar them from accessing finance.

The high street banks involved in the scheme are:

• First Trust Bank
• Bank of Ireland
• Barclays
• Clydesdale Bank
• Danske Bank
• HSBC
• Lloyds Bank
• RBS
• Santander

Learn more about the Bank Referral Scheme.

Community Development Finance Institutions 

A Community Development Financial Institution (CDFI) operates as a non-profit entity, dedicated to offering debt financing and additional support to businesses. 

This support is delivered through a personalised, relationship-oriented approach to lending.
Unlike a traditional lender, a CDFI will get to know your business and offer you guidance in completing your loan application. 

Borrowers are required to repay the loan along with interest and any other fees that may have been agreed upon, over a predetermined period.

CDFIs typically provide loans ranging from £25,000 to £250,000. 

However, the flexibility of these institutions allows for both smaller and larger loans, with some offering financing as low as £1,000 and extending beyond £250,000, catering to a wide variety of business needs.

Learn more about Community Development Finance Institutions.

Start Up Loan

If your business is under three years old, you may be eligible for a Start Up Loan. 

Start-up businesses can be turned down for a business loan by traditional lenders for a variety of reasons such as lack of a track record, absence of business assets to use as collateral, or not yet being profitable.

A Start Up Loan is different to a traditional bank loan because it is a personal loan in nature yet intended for business use.

Importantly, it is also unsecured, eliminating the need for borrowers to offer personal assets, such as their home, as collateral.

The provision of Start Up Loans is managed by the Start Up Loans Company, an organisation backed by the UK Government, ensuring reliable support for new businesses. 

Eligible individuals can access loan amounts ranging from £500 to £25,000, with repayment terms stretching from one to five years. 

These loans come with a fixed interest rate of 6% per annum, offering predictability in repayment plans.

Applicants benefit from personalised guidance throughout the application process, thanks to being matched with a dedicated business adviser. 

This tailored support aims to enhance the chances of a successful application. 

Furthermore, upon securing a loan, recipients gain access to an invaluable resource: 12 months of free mentoring, designed to provide ongoing support and advice during the critical early stages of business development.

Learn more about Start Up Loans.

Peer to Peer lending

Peer-to-Peer (P2P) lending is becoming an increasingly popular financing option for UK businesses, offering a modern twist on traditional lending methods. 

This innovative approach connects borrowers directly with lenders through either online platforms or offline brokers, streamlining the loan acquisition process.

Prospective borrowers begin by completing an online application, detailing the intended use of the funds, the desired loan amount, and the repayment period. 

Additionally, applicants must submit specific information about their business. 

One of the key advantages of P2P lending platforms is their efficiency; decisions on loan applications can be rendered almost immediately in some cases. 

As a result, borrowers could potentially receive their funds in just a few days.

Upon securing a loan, borrowers are typically required to pay an arrangement fee to the P2P platform. 

The repayment of the loan itself, along with interest, is then made through scheduled payments over the term of the loan agreement. 

This model not only allows for quicker access to funds but also offers a level of convenience and flexibility not always found in traditional banking systems.

Learn more about Peer-to-Peer lending.

Exploring alternative lending options to business loans

Being refused a business loan doesn't mean you're out of funding options. 

We’ve put together a short list of some of the different potential routes to financing your business instead of a traditional bank loan.

Business Grants

Business grants are financial awards provided by government entities or private organisations, earmarked for specific purposes like training initiatives, business expansion, or research and development projects. 

A distinct advantage of business grants over other financing options is that they do not require repayment. 

Additionally, recipients are not obligated to relinquish any equity in their business as a condition of receiving the grant.

The UK boasts a wide array of business grants, with particular sectors such as energy, export, and innovation being especially popular with various grant programs. 

While some grants can be awarded for hundreds of thousands of pounds, it is more common for awards to be in the range of a few thousand pounds. 

As a result, businesses frequently need to complement grant funding with other types of finance to fully cover the costs of their intended projects.

Learn more about Business Grants.

Equity finance

Equity funding is a type of finance that involves business owners selling a stake in their organisation to an investor to obtain the necessary capital for expansion. 

This exchange not only brings in funds but also makes investors part-owners, granting them a proportionate share of the company's profits and assets. 

Additionally, it may afford investors a voice in significant business decisions.

This form of funding is particularly beneficial for early-stage companies, often in the form of Angel Investment, Equity Crowdfunding, or Venture Capital. 

More established companies can also benefit from equity financing through Private Equity, Expansion Capital, or even an Initial Public Offering.

Equity funding is structured in stages or rounds, each designed to support a company at various phases of its growth. 

These funding rounds are pivotal, as the capital raised is typically earmarked for advancing the company to its next stage of development.

Viewed as milestones, these rounds of funding provide a structured path for transforming an idea into a thriving business. 

Each round represents a step forward in the company's journey towards becoming an established entity in its industry.

Learn more about Equity finance.

Business credit cards

If your business is refused a business loan from a bank, you may decide to try and find the funds you need in the short term by using a business credit card.

A business credit card is tailored for corporate rather than personal use, playing an important role in the financial management of a company. 

These cards are accessible to a wide range of businesses, from small to large, and come with several advantages.

Although business credit cards function in a manner similar to personal credit cards, they have unique features. 

One key difference is the higher credit limit offered on business cards, which is determined by considering both personal income and business revenue.

Moreover, making timely payments on a business credit card can positively affect the company's credit history. 

A strong credit profile, in turn, may improve a business's eligibility for future financing options, such as loans or additional lines of credit, by demonstrating financial reliability and stability.

Learn more about business credit cards.

Business overdraft

Another potential source of short-term funding for your business if it’s refused a business loan could be via a business overdraft.

A business overdraft functions as a flexible credit facility linked to your company's bank account, offering additional short-term financial liquidity beyond what your business's capital can cover. 

Unlike a business loan, which has predetermined repayment schedules and interest rates, a business overdraft incurs interest charges solely on the overdrawn amount. 

This flexibility allows businesses to repay the overdraft according to their cash flow situation, although it's important to note that banks reserve the right to request repayment at any time. 

Additionally, banks may impose a fee for the use of an overdraft facility.

One of the key advantages of a business overdraft is its adaptability to your company's changing financial needs. 

You have the option to request an increase or decrease in your overdraft limit, subject to your bank's approval. 

This feature makes a business overdraft a convenient solution for managing fluctuating cash flow requirements.

Learn more about business overdrafts.