As a small business or startup, you don’t have huge resources. If there’s a cash crunch and you need to pay salaries, or you’ve spotted a great opportunity and want to grow your business, you need funds. So what are your options if a bank rejects your small business loan application?
There are lots of reasons why this might happen – you may not have a steady cash flow, your credit score may be too low or you may have an insufficient operating history. You should always seek feedback as to why you were rejected. You can then appeal to the financial institution if you disagree with the reasons provided, and you can make a further complaint via the Financial Ombudsman or the Credit and Investments Ombudsman if the bank doesn’t respond.
This does take a long time, and unfortunately most of the reasons for rejection aren’t something you can quickly fix. This means you should have a Plan B.
1. Try Another Bank
This may not be any more successful than the first attempt, but if there was a reason for rejection that you can fix, do so and give it another try. It may be worth getting input from your accountant to ensure you’re presenting all your documents correctly. If you do have a solid trading history and good cash flow, make sure you demonstrate this clearly. It can be time-consuming trying to secure finance, and investing in professional advice may be money well spent.
2. Go Through a Loan Broker
A commercial loan broker or professional advisor may be able to help you get the loan you need. They will have current knowledge about what loans are available, whether from banks, credit unions or other providers, as well as the likelihood of you getting them. Check the broker is licensed, and get a written agreement before signing up to anything.
3. Try Factoring (Invoice Finance)
This may be an option if you have invoices amounting to the value of what you need. Specialist finance companies will advance you money on your invoices – usually up to 80% – charging a percentage of the invoice value (usually around 3.5%) to do so. Generally you can get the money within a couple of days.
4. Alternative Lending
From crowdfunding to peer-to-peer (P2P) lending, this could be an option for you. P2P lending is still a relatively new model in Australia, but it has already become established in the US and the UK. Interestingly, many traditional banks have been investing in P2P lenders, creating more confidence in the sector. There are companies offering up to $2 million in business loans, but do your research and ensure you can meet the various terms and conditions.
5. Specialist Small Loan Providers
For small amounts of very quick cash, there are dedicated online lenders that can often advance you money within hours of applying. These are sometimes called “payday loans”. The downside is that the amount you can borrow is often not high, and you do need to repay it quickly to avoid high interest rates. But if it’s just to tide you over during a temporary cash crisis, it could be an option. These loans do have a range of fees, so be very careful. If you don’t think you can pay it back within the time frame, be particularly cautious as default fees and charges can be high.
6. Credit Cards
Credit cards are generally considered an expensive form of debt, but as an emergency measure they may be your easiest option. Ensure you can at least pay the minimum balance each month, or costs will spiral. The same goes for an overdraft, where interest charges may even be tax deductible. Ensure you have an authorised overdraft facility with your bank account, as unauthorised overdrafts can result in hefty penalty fees.
7. Friends and Family
It’s always worth trying the ‘family bank’. If you choose to go down this road, have documents drawn up properly to protect both sides and future relationships. Many businesses have been successfully funded by an early loan from a family member.
Finally, it may be worth renegotiating your own debts to creditors, and working out a payment plan if that’s the reason you need the loan. Adjusting your own payment terms so your customers pay you earlier may also help. Always seek professional financial advice before seeking out funding alternatives.
This information is factual only and is not intended to to imply any recommendation about any financial products or constitute advice. You are responsible for consulting with your own professional tax advisors and financial advisors concerning specific tax or financial circumstances for your business. Intuit disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your business finance. If you have questions regarding accounting issues specifically related to your industry or your business circumstances, you should consult with your own professional tax advisor, accountant, attorney, industry expert or professional association.