As a contractor, you are aware there may be times when you need an infusion of cash for any number of reasons. Maybe your business is cyclical so you need a little boost during down times. Maybe a new opportunity has come up and you need to beef up your team, equipment or both to be able to take advantage of it. Maybe you want to expand your business into a new territory or new service area.
Once you’ve identified the why, the next logical step is to move on to the how, which likely means applying for a business loan. Let’s say you did that—and you were denied. Are you out of options? Keep reading.
Why Your Business Loan Was Denied
Traditional lenders are often hesitant to make loans to those in the construction industry for a number of reasons: project complexity and uncertainty, higher risk, collateral challenges, market conditions and bank regulatory requirements. While those factors may play into your application being denied, there are typically three reasons cited for that outcome:
- Poor personal credit. Even though you are seeking funds for your business, lenders are going to check your personal credit history as part of the loan application review process. If they see lots of late payments, debt or other negative items—leading to a low personal credit score—that’s a red flag for them.
- No track record. There’s a reason companies that have been in business for less than two years are often denied loans—they can’t prove their stability over the long term. Many lenders will not be comfortable taking a chance on a new business.
- Not enough cash flow. Lenders need to know you will have the ability to repay your loan, so if they have doubts about whether you have the cash flow to handle your business expenses plus a loan payment, they usually will deny your request.
Does this mean you’re out of luck? Maybe not.
What To Do When Your Business Loan is Denied
There are a few things you can do to improve your chances of getting approved the next time you apply for a business loan. Focus on the reason your loan was denied by:
- Working to improve your credit rating. Begin by getting a copy of your current credit report and reviewing it for accuracy. Then look at areas to improve, such as paying down debt and closing store credit card accounts you don’t use.
- Enhancing your payment collection efforts. If slow-paying customers are causing you to have cash flow issues, you need to take steps to get paid in a more timely fashion.
While looking toward the future is a good thing, it doesn’t solve your immediate issue of needing funds now. You do have some options to consider.
Short-Term and Alternative Lending Solutions for Contractors
When you need financing immediately but have been turned down for a loan by a traditional lender, you might look into one of these four options:
- Credit cards. While they are not a solution for most cash flow problems, credit cards can cover short-term purchases and delay payments. Shop around for the best deal, understanding your credit history and rating will influence what type of offers you receive.
- Material financing. If you’re in a bind because you need funds to purchase materials for a project, material financing can allow you to delay repayment until your customer has paid you.
- Invoice factoring. If you have outstanding receivables, an invoice factoring company will buy them in exchange for a partial payment. When your customer pays the company, you’ll receive the balance minus their fee, usually 1 to 3% of the invoice’s value.
- Alternative lending. There are plenty of non-bank lenders that offer products such as equipment financing, business lines of credit, working capital loans and even bad credit business loans. Do your homework to ensure you’re working with a reputable lender and you may be pleasantly surprised to hear “yes” even after you’ve heard “no” from a traditional lender.
Clear Skies Capital has helped many contractors determine the loan option that’s best for them, even after they’ve been turned down elsewhere. Contact us today at 800-230-9822 to discuss your specific needs.