What to do if your business loan application is rejected
If your business loan application is rejected by a bank it can be a difficult experience but there are alternative forms of finance for your business other than loans offered by high street banks.
If you've had your business loan application rejected it's important to understand why this might have happened as this will help you to understand what options you have to secure finance for your business from other means.
Common reasons for rejecting a business loan application include:
- a low credit rating
- insufficient security for the loan
- a weak business plan and financial forecasts including cash flow
- low risk appetite from the lender in terms of the particular sector your business operates in.
Debt finance
Even if you’ve been rejected for a business loan from a bank, you may still be able to secure debt finance from another provider.
Try another lender
High street banks will each have different lending criteria which they use to assess applications.
Therefore, a rejection from one bank does not necessarily mean that an application to another bank will also be rejected.
In many cases, a business loan rejection has nothing to do with the viability of your business, and is instead the result of other factors, such as a bank already having a certain number of customers operating in your sector and therefore wanting to avoid increasing exposure.
In essence, business owners should never be discouraged if their first application for a loan is rejected, especially if its not immediately obvious why, it could just have more to do with the bank itself than with your business.
Bank Referral Scheme
Launched in November 2016, the Bank Referral Scheme aims to make it easier for smaller businesses to obtain financing.
The referral scheme requires participating banks to offer a referral to an online finance platform if they reject a business's request for funding.
These platforms can connect smaller businesses with alternative finance providers who may be able to provide the necessary funding.
The goal of the Bank Referral Scheme is to ensure that viable businesses, which may not meet the risk criteria of traditional banks, still have access to the financial resources needed to grow and succeed.
Learn more about the Bank Referral Scheme.
Community Development Finance Institutions
A Community Development Finance Institution (CDFI) is a non-profit lender that offers loans and support to businesses using a relationship-focused approach.
This allows CDFIs to look beyond a weak balance sheet or a poor credit history to the fundamentals of both the business and the people behind it.
When you take out a loan from a CDFI, you'll need to repay it with interest and any agreed-upon fees over a specified period.
Typically, CDFIs lend amounts ranging from £25,000 to £250,000.
However, some may offer loans starting as low as £1,000 and going above £250,000.
Learn more about Community Development Finance Institutions.
Start Up Loan
If your business is less than three years old, you may qualify for a Start Up Loan.
Many start-up businesses face rejection from traditional lenders due to reasons such as a lack of track record, insufficient business assets for collateral, or not yet being profitable.
A Start Up Loan differs from a traditional bank loan as it is a personal loan intended for business use.
It is also unsecured, meaning borrowers are not required to provide personal assets, like their home, as security.
Eligible individuals can secure loan amounts ranging from £500 to £25,000, with repayment terms from one to five years.
These loans feature a fixed interest rate of 6% per annum, offering consistency in repayment plans.
Applicants receive personalised guidance throughout the process, paired with a dedicated business adviser to increase the chances of an application being successful.
Additionally, recipients gain access to 12 months of free mentoring, providing essential ongoing support and guidance during the crucial early stages of business development.
Learn more about Start Up Loans.
Peer-to-peer lending
Peer-to-peer (P2P) lending connects borrowers with lenders through online platforms or offline brokers.
To apply you'll need to fill out an online form and provide details about how your business will use the loan, the amount you wish to borrow, and the desired repayment period as well as some specific information about your business.
The platform will then match you with suitable lenders.
Some P2P platforms can offer almost immediate decisions, in some cases allowing you to receive the loan within just a few days.
Upon approval, there may be an arrangement fee payable to the P2P platform.
The loan is then repaid, with interest, through regular instalments over the term of the loan agreement.
Learn more about Peer-to-peer lending.
Equity Financing
In addition to debt financing, it might also be worth exploring various forms of equity finance to generate capital.
Angel investment
An angel investor is an individual who invests their personal funds in a small business in exchange for a minority equity stake, usually ranging from 10% to 25%.
These investors often have backgrounds as entrepreneurs or possess extensive experience in the business world.
Angel investment is about more than just financial support though.
Investors provide mentoring and guidance, allowing businesses to benefit from their time, skills, contacts, and business acumen.
They adopt a hands-on approach, frequently collaborating with the entrepreneur to drive the business forward.
The relationship between the angel investor and the entrepreneur is crucial, as they typically work together closely for at least five years.
Angel investors usually invest amounts ranging from £5,000 to £500,000 in a single business, depending on the specific needs and growth potential of the enterprise.
Learn more about Angel investment.
Equity crowdfunding
Equity crowdfunding offers businesses a regulated method to raise funds from numerous investors.
By listing on an online platform, both investors and the general public can buy shares in your business.
Before you can list, an equity crowdfunding platform will evaluate your business and the documentation you provide to ensure they meet the platform’s standards.
Some platforms may also assist you in determining the appropriate timeframe and investment amount to request.
It's important to note that not all crowdfunding platforms offer the same services.
While some manage communication with shareholders, others provide business guidance.
Therefore, it's essential to discuss the specific services and specialties of each platform before committing to one.
Learn more about Equity crowdfunding.
British Business Bank plc is a development bank wholly owned by HM Government. British Business Bank plc and its subsidiaries are not banking institutions and do not operate as such. They are not authorised or regulated by the Prudential Regulation Authority (PRA) or the Financial Conduct Authority (FCA). A complete legal structure chart for the group can be found at british-business-bank.co.uk.
Whilst we make reasonable efforts to keep the information in this guide up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.
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In 2023 CDFI's lent £287m to over 90,000 businesses across the UK.
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