What to do Next if your Finance Application is Rejected

Step One: Find out why your application was not approved

Once you are notified that your application has been rejected, don't be afraid to reach out to your bank for more details if it's not clear why you were turned down. Prepare a set of questions for the conversation such as:

Was it your credit score?
Was it the reason for finance?
Was it the landscape of the industry you're in?

Or, if it's something else entirely, ask for clarification so that you can make improvements where necessary.

Some of the most common reasons for rejection can simply be due to the bank's criteria, with many small businesses applying to banks which aren't likely to accept them. So, before you think about reapplying for credit, be sure to research the lender's criteria. Many banks and other lenders publish their lending criteria online and that should give you a sound understanding of what you need to do to be approved. Applying this knowledge against the feedback from your previous rejection will increase your chances of approval next time, whether you go back to the same lender or look into alternative finance options.

Step Two: Check your personal and business credit score

Many people do not often consider the affect their credit score can have on their loan application before applying for credit. However, credit scoring is a huge part of banks' process of assessing the risk of lending to you, and is therefore a primary reason why small businesses are often declined finance. You can view both your personal and business credit reports [3] through agencies online which give an insight into how to improve your score.

Lenders will also view the information included in these reports as it gives a solid history of your borrowing, as well as how you have managed your payments and accounts. If for example, you have faced challenges on making payments on time, this could directly lower your score. There are no shortcuts to increasing your credit score, but after paying your bills on time for six months, you may find that this helps to improve your credit profile to make it more attractive to lenders. Ensure to check your credit report is up to date and accurate, and if you spot any mistakes make sure to correct them by contacting the relevant lender.

Step Three: Revisit your figures

Banks will not lend money for anything too risky, therefore your ability to repay is vital. Half of UK start-ups fail within the first five years [4], so if you've been in business for less than five years banks will often delve deeper into assessing the risks of lending to you. Consequently, the reason you may be declined finance by a bank could be because they think you are not able to repay. Though you may have every confidence in yourself, and the future of your business growth, your figures need to support your belief accurately.

Banks will review your latest tax return and your historical revenue over a couple years to establish a pattern in the performance of your business. If your business has been stable or growing each year, this will give more confidence to the lender. However, most banks will not lend to unprofitable businesses with poor evidence of success as shown on their tax return. Revisit your tax strategy with your accountant because whilst deducting all expenses from your business may reduce your tax requirement, it also reduces the business's income. Review your figures to determine whether it will aid your loan application to shoulder the tax costs due to fewer expense deductions.

Step Four: Establish a strong business model

It is important to demonstrate to the finance provider your ability to make profit. You will need to clearly define what the money you borrow will be used for, when it will be used and exactly how it will make a profitable return for you. If the bank is not convinced by your business model, and the thoroughness of your financial planning, then you are likely to be declined.

A strong business model will outline how your business works, and will identify your specific target audience and how your product or service will deliver value to your customers. Establish a business plan including careful consideration of your cost structure by spending time, focus and development on smart strategies [5] to spend money wisely. Banks are wary of investing in businesses that pose too much risk. It is important that you remove as much risk as possible, have a viable back-up plan and a strong business model that demonstrates the likelihood of how you'll achieve success.

Step Five: Look for alternative finance

Based on what you've learnt above, another solution could be to look at alternative finance providers that offer funding to credit-worthy businesses which are looking to grow. Alternative finance providers understand the needs and wants of small businesses more than traditional lenders. They are well versed in the challenges faced by small business owners and their need to find finance to help their projects become reality.

Many alternative lenders offer flexible approaches to lending. For example, peer-to-peer lending is a flexible way of receiving cash injections or, if you have strong sales, a merchant cash advance can provide a lump-sum payment to your business in exchange for an agreed percentage of your future card transactions sales. By using a business loan calculator [6] you can discover how much you could borrow and whether this is a viable finance solution for you. Make sure you compare all types of loans and alternative finance providers to find the best solution to suit your needs.