When a bank denies your small business loan application, it can feel like a dead end, but it is not.

Many small business owners are unaware that there are alternative financing options available outside of traditional bank loans.

In this article, we will break down the seven most common reasons banks reject small business loan applications, from limited credit history to inconsistent cash flow. We will also explain how private lenders can offer flexible short-term funding that helps you meet immediate needs and improve your chances of qualifying for traditional bank financing in the future.

It is important to note, however, that at Montegra, we do not provide unsecured small business loans. We only fund loans that are secured by first deeds of trust on real estate. In most cases, the real estate is not owned by the business itself but by the owner of the business as a personal investment property. This distinction means we do not offer traditional “small business loans,” but instead provide private capital loans secured by real estate.

7 Reasons Banks Reject Small Business Loan Applications

Knowing why banks say no can help borrowers prepare for future applications and decide when alternative financing may be the right choice. Here are seven common reasons.

Heightened Regulation Standards 

In the wake of the recession, increased federal regulations have resulted in banks being more conservative about the amount of risk in their investment portfolio. Small business lending inherently carries more risk than lending to large corporations, which often makes banks hesitant to approve these loans.

Underprepared Applicants

Sometimes, small business owners don’t understand the process of applying for a small business loan and think that they can just walk into a bank, fill out an application, and get approved on the spot.

Whether requesting a conventional small business loan or a private capital loan, it’s important for small business owners to come prepared with a business plan, financial statements or projections, bank statements, tax returns, credit reports (business and personal credit scores), and copies of any relevant legal documents (such as articles of incorporation, leases, contracts, operating licenses or permits). Without these materials, lenders may see the business as unprepared or high risk, which can quickly lead to a loan application being denied.

Collateral Requirements

Banks will often require a small business to put up property as collateral for the loan, even if the loan is not for a real estate purchase. This requirement can put pressure on small business owners who lack valuable business assets, forcing them to use personal property, such as a car or house, as collateral to secure the small business loan.

Montegra specializes in this type of collateral-based lending. We only provide loans secured by real estate, and in many cases, this real estate is owned personally by the business owner rather than by the business entity itself.

If you are a small business owner, a private capital loan can be a helpful short-term solution by making it easier to purchase your first property, or by offering you a cash-out loan with fewer financial constraints than a conventional small business loan if you already own a property outright.

Credit Problems

Having little or no credit history as a start-up company can be one of the biggest lending hurdles for a small business owner. This is another situation in which private capital loans can be helpful, as private lenders are less interested in credit history and more interested in the value of the real estate that would secure the loan.

Decreased Community Banking

Historically, community banks are three times more likely to approve a small business loan than big banks. However, the number of community banks has been dropping since the 1980s, and many were major casualties of the housing crisis and recession, significantly reducing funding opportunities for small businesses.

In contrast, private capital lenders have become a more permanent presence in the real estate financing industry, especially in recent years, as bank financing has become harder to obtain.

Cash Flow Problems

Increased federal regulations have made bank lenders even more concerned about debt service coverage ratio—the cash flow available to pay current obligations such as payroll, inventory, rent, and other expenses, along with the new loan payment.

Private lenders, on the other hand, have more freedom to structure a loan to meet the small business owner’s needs.

Smaller Loan Amounts

Because it costs banks roughly the same to underwrite a $200,000 loan as it does a $1 million loan, they tend to prioritize larger corporate loans where the profit potential is higher.

However, most private capital lenders are small business owners themselves, which makes them more willing to consider funding loans as low as $300,000.

Private Lending Options for Small Businesses in Colorado

If your small business is having trouble securing financing through a traditional bank, private lending may be the right solution, especially for real estate-related purchases. Montegra does not make unsecured loans to small businesses. Every loan we fund must be secured by a first deed of trust on real property, and more often than not, that property is owned personally by the business owner rather than the business entity.

Call us at 720-741-6620 to discuss your loan request and learn how our private capital lending programs can support your next steps.