Business Loan Denied? Yield symbol and construction site photo

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If you’ve recently applied for and had your construction business loan denied, you may be wondering what to do next. You have bills to pay and payroll to make, but the cash just isn’t there. 

Unfortunately, businesses in the construction industry already have one strike against them when it comes to qualifying for business loans. Construction is seen as an unstable or seasonal industry, so banks are hesitant to provide loans. 

Fear not, because there are some things you can do to improve your chances of getting a loan in the future, and we also have some short-term fixes to help you pay your expenses.

Why your business loan was denied

First, let’s start with why your loan application was denied, because until you know that you don’t know what to fix. While we can’t tell you for sure why your loan was denied, there are some common reasons that banks reject loan applications. Of course, you should check with your bank to get feedback, so you know what you need to address for next time. 

Here are the three biggest reasons your application may have been rejected.

1. You have poor personal credit

While you may be applying for a loan for your business, the bank still checks your personal credit history when reviewing your application. So, if you have late payments, lots of debt, or other negative items on your credit report, the bank may decide not to loan you money. You should regularly check your credit history and credit score to make sure everything is accurate and fix any errors.

2. You just started your business

If you’ve been in business for less than two years, there’s a good chance the bank won’t loan to you. New companies often fail within the first couple of years, so the bank wants to make sure you’re stable before it takes a chance on you. Also, if your business is new, your personal credit history will weigh more heavily on the bank’s decision.

3. You don’t have enough cash flow

Before it will loan you money, the bank needs to be assured that you can cover your business expenses and the loan payments each month.

To do this, your cash flow each month has to cover both. Even though you may be reporting enough income to pay for everything, if you aren’t getting paid by your customers, you may not have enough cash coming in to cover those expenses. To protect the bank’s interest, they have to know that you have a steady stream of cash available.

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What to do if your business loan was denied

Depending on exactly why your loan was denied, there’re a few things you can do to improve your chances of getting approved the next time you apply.

Improve your credit rating

If your credit history or credit score were part of the reason you were denied a loan, you’ll need to do what you can to improve it. Start by pulling a current credit report and review it for accuracy.

You can get a free report annually from all three credit bureaus. If there’s incorrect information on the report, dispute it by contacting the companies and requesting that it be removed. If you have a lot of open credit accounts, like store credit cards, that you aren’t using, close them. If you have a large amount of debt, you’ll need to work to pay it down as quickly as possible.

Step up your payment collection efforts

If you’re bringing in enough income, but aren’t getting paid by your customers, you’ll need to review your collection policy, or create one you don’t have one. A collection policy tells your credit department what steps they need to take to try to collect payments. It usually includes instructions on when to reach out to customers, send payment reminders, and how you protect your right to payment. These processes may include sending preliminary notices to protect your right to file a lien if your customer doesn’t pay you. Stepping up your collection efforts improves your cash flow and makes you more attractive to banks.

Try an SBA-backed loan

The Small Business Administration (SBA) offers government-backed loans to companies that have exhausted other financing options. If you’ve been denied a loan by multiple banks, you could qualify for an SBA loan. The loans are distributed through local banks, and the bar to qualify is usually lower than a standard small business loan. The bank will still look at your credit history, however, so make sure it’s up-to-date and accurate.

Short-term solutions

If you’re cash-strapped and need money to cover short-term expenses, you have some options.

Credit cards

You can quickly apply for credit cards to cover short-term purchases and delay payment. However, keep in mind that, while they can provide a stop-gap, credit cards are not a solution for most cash flow problems

If you decide that a credit card is the smartest decision for your business, shop around for the best deal. Some cards offer points that can be redeemed for rewards, airline miles, or cash. If you apply online, you could have credit available almost immediately. Your credit history and rating will influence the type of offers you’ll receive.

Related: The 8 Best Credit Cards for Contractors

Material financing

If you need money to pay for materials for a project, you can use material financing to delay the costs. This type of financing can give you up to 120 days to pay for the materials you need to keep your business running. Suppliers provide financing through a third party, which pays the supplier immediately after the sale. You can then start work on the project and pay for the materials after your customer pays you.

Invoice factoring

If you have current receivables that are outstanding, you can sell them to an invoice factoring company in exchange for a partial payment on those invoices. Your customer then pays the factoring company, and the factoring company sends you the balance of the invoice minus their fee. This is a great way to convert current income into cash quickly, without having to apply for credit. The factoring company looks at the credit rating of your customer, not you. Fees can be from 1 to 3% of the total invoice value.

You have options

Cash flow is the number one cause of construction bankruptcies, and slow payments are a major cause of cash problems for contractors. In many cases, taking simple steps to get paid faster can have an outsized impact on your bottom line — and reduce the need for loans or additional financing.

If you’ve been denied a business loan due to a poor credit history, just starting your business, or not having enough cash flow, you can begin working on improving your credit profile, while taking advantage of short-term financing options. Credit cards, material financing, and invoice factoring are great ways to cover expenses and get cash quickly. They may not work for the long run, however, so you need to plan ahead.

Protecting your payment rights is always a good financial strategy. If you don’t have a collection policy that details your process for collecting payments from your customers, you should create one now. We even have a free sample policy that you can use to get started.