My bank said no to a business loan. Why, and what now?
Sterling's answer Banks say no for reasons you can usually find out, and federal rules give you a right to ask for them. Get the reason in writing first, because it tells you whether to fix something, wait, or try a different kind of funder.
Want a straight answer for your business?
See who'll fund meBanks usually decline business loans for a handful of reasons: not enough time trading, profits too thin to cover the payment, weak personal credit, not enough collateral, too much existing debt, or an industry the bank avoids. You don't have to guess. Federal rules give business applicants a right to be told the outcome and, in most cases, the reasons.
Your right to the reasons
The Equal Credit Opportunity Act's Regulation B covers business credit as well as consumer credit. How it works depends on your size.
- Gross revenues of $1 million or less. The bank must tell you the action taken, which it may do orally or in writing, and must give you a statement of reasons or tell you how to get one.
- Gross revenues over $1 million. The bank must notify you of the decision within a reasonable time, and give written reasons if you ask for them in writing within 60 days.
Write to the bank and ask. A one-line reason, such as "insufficient time in business" or "debt service coverage", is the most useful thing you'll get from a decline.
The usual reasons, and what each means
| Reason | What it really means | What can change it |
|---|---|---|
| Time in business | The bank wants a longer track record | Time, or a non-bank product that weighs deposits |
| Cash flow / debt service | Profit after costs doesn't comfortably cover the payment | A smaller amount, a longer term, or higher profit |
| Personal credit | The guarantor's history worries them | Fix errors, reduce balances, wait out recent late payments |
| Collateral | Not enough assets to secure the loan | Equipment financing, an SBA loan, or a smaller amount |
| Existing debt | Too much already going out | Consolidate or refinance first |
| Industry | Bank policy, not your business | A specialist funder for your trade |
The worked number
Banks look at whether profit covers the payment with room to spare. Say you ask for $100,000 over 24 months at 18% APR. That's $4,992.41 a month, about $59,900 a year. If the business makes $70,000 a year in profit before that payment, the loan eats most of it. Ask for the same amount over a longer term, or a smaller amount, and the picture changes.
Sterling's take: a "no" on cash flow is usually a "no" to the size or the term, not to you.
What not to do next
- Don't fire off applications to five more banks. Each one can mean another hard inquiry, and those can lower your score.
- Don't jump to the most expensive fast money just because it says yes. Convert any offer to an APR first.
What to do next
- Get the reason in writing.
- Match it to the table above and decide: fix, wait, or change product.
- If it was collateral or time trading, read is an SBA loan right for me. SBA loans exist partly for businesses that can't get credit on reasonable terms elsewhere.
- If you need working capital sooner, compare non-bank options on APR, not just on whether they'll say yes.
- If the reason was credit, read what credit score do I need.
Ready for a straight answer?
Two minutes of questions. One funding specialist. No impact on your credit score.
Questions owners ask
Does a bank have to tell me why it declined my business loan?
Under Regulation B, a creditor must notify a business applicant of a decline. For businesses with gross revenues of $1 million or less, you're entitled to a statement of reasons; above that, you get the reasons if you ask in writing within 60 days.
Should I apply to another bank straight away?
Not until you know the reason. If it was time trading or collateral, the next bank will likely say the same, and each application can mean another hard credit inquiry.
Is a non-bank funder a good next step?
It can be, if the reason was something a non-bank weighs differently, such as time trading or collateral. Expect a higher cost and convert any offer to an APR.
Can I ask the bank to reconsider?
Yes. If the decline rested on something you can explain or fix, such as a one-off loss or a missing document, ask what would change the answer.