“Anything that is measured and watched, improves.”
-Bob Parsons, GoDaddy founder
General Requirements (takes about 5-minutes or less to apply online)
680 FICO score (Transunion or Experian FICO model 8.0 or similar)
Less than -15% operating loss in the last year of business
Last 2-Years of filed Business Tax Returns; Last 1-Year of filed Personal Tax Returns
Last 3-months of bank statements; copy of Driver’s License
Business Financing Hurdles: When Traditional Business Funding Dries Up
Facing Financing Roadblocks
Securing enough working capital is essential for any small business aiming to grow, stabilize, or simply survive.
Many owners first turn to traditional sources like banks, credit unions, or loans backed by the U.S. Small Business Administration (SBA).
However, being turned down by these conventional lenders is a frustratingly common hurdle, even for businesses that seem financially healthy.
Understanding the reasons for rejection and knowing the alternative options is vital for overcoming these challenges and keeping the business running.
What is Traditional Financing?
Typically, traditional financing means applying for term loans or lines of credit from banks and similar institutions.
SBA-backed loans, like the popular 7(a) and 504 programs, aim to make funding easier by lowering the risk for lenders.
These loans can fund various needs, including working capital, buying assets like property or machinery, expansion, or paying off existing business debt.
The SBA's goal is to help small businesses get loans they might not qualify for under strict traditional rules.
Why Do Traditional Lenders Say No?
Despite programs designed to help, many small businesses face loan denials. Lenders primarily focus on the perceived risk and the business's likelihood of repaying the debt. Common reasons for rejection include:
Credit Issues: Low personal credit scores (often below 650-690) or a weak business credit history signal higher risk. Late payments, defaults, or bankruptcies are major red flags.
Cash Flow Problems: Lenders need to see that the business generates enough cash to comfortably cover new loan payments. Insufficient, inconsistent, or negative cash flow is a significant concern. They often look for a Debt Service Coverage Ratio (DSCR) well above 1.0 (e.g., 1.25 or higher).
Lack of Collateral: Many traditional loans require tangible assets (like property or equipment) as security. Startups or service businesses often lack sufficient collateral.
High Existing Debt: Businesses already carrying a lot of debt are seen as riskier borrowers. High debt-to-income ratios or credit utilization (over 30%) are warning signs.
Business Plan or Viability Concerns: A weak or unconvincing business plan, unclear use of funds, or unrealistic financial forecasts can shake lender confidence.
Limited Operating History or Industry Risk: New businesses (under two years old) are inherently viewed as riskier. Certain industries (like restaurants, retail, construction) may face tougher scrutiny due to perceived volatility or higher failure rates.
Application Deficiencies: Simple mistakes, missing documents, or failing to provide requested information can lead to rejection.
Moving Beyond Rejection: Exploring Alternatives
Getting denied by traditional lenders isn't the end. It signals a need to explore different strategies. This guide examines various alternative financing options, internal operational improvements to boost financial health, and strategic shifts that can ensure the business's survival and solvency.
Exploring Alternative Financing Avenues
The Alternative Finance Landscape
When banks say no, the alternative finance market offers other possibilities.
This includes non-bank lenders and online platforms that often use different methods to assess risk.
They might focus more on unpaid invoices, daily sales volume, specific asset values, or project potential rather than just traditional credit scores and collateral.
While potentially more accessible, these alternatives often come with higher costs or different risk structures compared to bank loans.
Invoice Financing & Factoring: Unlocking Cash from Receivables
What Are They?
For businesses selling to other businesses (B2B), waiting for customers to pay invoices (often 30-90 days) can strain cash flow.
Invoice financing and factoring let businesses get cash immediately based on these unpaid invoices (accounts receivable or AR).
How Do They Work?
Invoice Financing (AR Financing): The business borrows against its invoices, getting an advance (e.g., 70-95% of the value). The business still owns the invoices and collects payment from customers. Once paid, the business repays the lender plus fees/interest.
Invoice Factoring: The business sells its invoices to a factor (a third-party company) at a discount. The factor advances a percentage (e.g., 70-90%) and then takes over collecting payment directly from the business's customers. After collection, the factor pays the remaining balance minus fees. Factoring can be recourse (business is liable if the customer doesn't pay) or non-recourse (factor takes the risk, usually for higher fees)
Pros
Fast access to working capital (often within 1-2 days).
Easier qualification, focusing on customer creditworthiness more than the borrower's.
Invoices act as collateral, reducing the need for other assets.
Flexible use of funds.
Factoring can shift non-payment risk (non-recourse) and save collection time.
May not add debt to the balance sheet (especially factoring).
Cons
Can be much more expensive than bank loans (high effective APRs).
Costs increase the longer invoices are unpaid.
Complex fee structures make true cost comparison difficult.
Recourse factoring leaves risk with the business.
Factoring can potentially harm customer relationships (third-party collections).
Not suitable for business-to-consumer (B2C) companies.
Costs and Terms
Highly variable costs: flat fees (1-5%), discount rates, or time-based fees (2-4% per month).
Advance rates: 70-95%.
Repayment tied to customer payment (30-90+ days).
Effective APRs can be high (potentially 15-35%+)
Eligibility
Primarily B2B or B2G businesses with verifiable invoices from creditworthy customers.
AR quality is key; borrower's credit is less critical.
Common in industries like manufacturing, wholesale, staffing, trucking
Understanding the True Cost
Factor rates or flat fees aren't APRs, making direct comparison hard.
Fees escalating over time and recourse vs. non-recourse differences add complexity. Businesses must model costs based on actual payment behavior.
Customer Relationship Impact
Factoring outsources collections, potentially saving time but risking customer goodwill. Financing keeps the relationship direct but retains the collection burden.
General Requirements (takes about 5-minutes or less to apply online)
680 FICO score (Transunion or Experian FICO model 8.0 or similar)
Less than -15% operating loss in the last year of business
Last 2-Years of filed Business Tax Returns; Last 1-Year of filed Personal Tax Returns
Last 3-months of bank statements; copy of Driver’s License
Asset-Based Lending (ABL): Leveraging Balance Sheet Value
What Is It?
ABL provides loans or lines of credit secured by specific business assets like accounts receivable, inventory, machinery, equipment, or real estate.
How Does It Work?
The funding amount is based on the appraised value (often liquidation value) of the assets, with the lender advancing a percentage (Loan-to-Value or LTV). LTVs are higher for liquid assets like AR (up to 80-90%) and lower for inventory/equipment. The process requires asset valuation and ongoing monitoring of collateral value via regular reports and potential audits.
Pros
Potentially larger loan amounts based on asset values.
Qualification focuses more on collateral quality than credit history/cash flow.
Can be faster than traditional underwriting (though appraisal takes time).
Interest rates often lower than unsecured options due to security.
Can be structured as revolving lines of credit, adapting to asset value changes.
Loan covenants often focus on collateral maintenance, potentially less restrictive.
Flexible use of funds.
Cons
Risk of losing pledged assets if the business defaults.
Requires sufficient valuable assets to qualify.
Ongoing monitoring/reporting can be burdensome and costly (audits, reports).
Costs (interest, appraisal, audit fees) can still be higher than traditional bank loans.
Only provides access to a percentage (LTV) of asset value.
Doesn't fix underlying cash flow issues; risk of debt cycle if funds aren't used productively.
Costs and Terms
Competitive interest rates for secured lending.
Significant fees: appraisal, audit, monitoring.
LTV ratios vary by asset type.
Term loans or revolving lines of credit structures.
Moderate funding timeline (weeks, requires asset valuation).
Eligibility
Suitable for businesses with substantial tangible assets (manufacturers, wholesalers, distributors).
Emphasis on collateral quality/valuation, less on credit score.
May require a certain scale of operations or asset base.
Needs robust financial reporting capabilities.
Distinction from Invoice Financing/Factoring
ABL is a loan secured by a pool of assets (AR, inventory, equipment, etc.), often larger/more complex, requiring broad monitoring. Invoice financing/factoring focuses only on AR, potentially more accessible for smaller businesses with fewer tangible assets.
The Collateral Monitoring Burden
While potentially having simpler financial covenants, ABL demands intensive collateral monitoring. This means frequent, detailed reporting (monthly AR aging, inventory counts) and potentially intrusive audits, creating a significant administrative load.
Grants: Non-Repayable Funding (But Highly Competitive)
What Are They?
Grants are financial awards from government agencies (federal, state, local), foundations, or corporations that do not need to be repaid if terms are met.
Sources of Grants
Government: Federal grants (Grants.gov). SBA grants focus on R&D (SBIR/STTR), support organizations, export promotion (STEP), disaster relief – rarely for general business startup/expansion. State/local governments offer various targeted programs.
Private/Foundation: Many foundations/corporations offer grants, often for specific industries, demographics (women, minorities), locations, or purposes (innovation, community impact).
Pros
Essentially free capital – no repayment, debt, or equity dilution.
Cons
Extremely competitive and difficult to obtain.
Very specific and narrow eligibility criteria.
Complex, time-consuming application process (detailed proposals needed).
Requires significant research to find relevant opportunities.
Funds restricted to specific uses outlined in the grant.
Risk of grant scams (beware unsolicited offers or fees).
Costs and Terms
No direct financial cost, but significant indirect cost in time/resources for research, writing, compliance.
Eligibility
Varies widely by grant. Depends on organization type, industry, location, owner demographics, grant purpose (R&D, job creation, etc.). Meeting eligibility is just the start; winning requires a compelling application aligned with grantor goals.
Strategic Alignment is Key
Winning grants requires showing how your project helps the grantor achieve their mission (e.g., tech innovation, community development). Frame applications as strategic proposals, not just requests for money.
The "Free Money" Myth and Opportunity Cost
While non-repayable, the time and resources spent researching, applying for, and managing grants (including reporting) divert effort from core business activities. This opportunity cost must be weighed against the potential award.
Strengthening Solvency from Within: Operational Strategies
Looking Inward First
Before or alongside seeking external funds, improving internal operations can boost solvency, free up cash, and reduce the need for borrowing.
A well-run business is also more attractive to future funders.
Aggressive Cost-Cutting: Trimming the Fat Strategically
Expense Analysis and Budgeting
Know where money goes. Use accounting software for detailed tracking. Review financial statements regularly. Implement a strict budget. Consider zero-based budgeting (ZBB) to justify every expense anew.
Vendor and Supplier Negotiations
Leverage existing relationships. Renegotiate for better pricing, discounts, or payment terms. Compare quotes regularly. Build strong supplier partnerships.
Overhead Reduction
Evaluate physical space needs: downsize, go remote/hybrid, use coworking spaces. Implement energy efficiency measures (LEDs, thermostat control).
Reviewing Discretionary Spending
Audit subscriptions, memberships, software licenses – cancel unused ones. Negotiate rates or use annual plans. Evaluate perks – trim expensive non-core benefits.
Streamlining Operations
Analyze marketing ROI; shift focus to cost-effective channels (SEO, email). Consider outsourcing non-core functions (payroll, IT) if cheaper/more efficient. Use lean management principles to eliminate waste.
Cultivating a Cost-Conscious Culture
Educate and empower employees to identify waste and suggest improvements. Make cost management a collaborative, ongoing effort.
Leveraging Technology Wisely
Use software to automate tasks (billing, payroll), streamline workflows (project management), reducing labor costs. Cloud solutions often have lower upfront costs. Analyze ROI before investing – avoid "subscription bloat."
Optimizing Accounts Receivable (AR) & Payable (AP): Managing Cash Flow
Accelerating Accounts Receivable (AR)
Getting Paid Faster
Establish Clear Terms: Define credit policies, due dates, payment methods, late fees upfront.
Invoice Promptly and Accurately: Send error-free invoices immediately. Use electronic invoicing.
Facilitate Easy Payment: Offer multiple convenient options (cards, ACH, online portals).
Implement Proactive Follow-Up: Send reminders before due dates; have a consistent dunning process for overdue accounts.
Leverage Automation: Use software for invoicing, reminders, tracking, payment application.
Monitor Performance: Track key metrics (DSO, ADD, CEI, AR Turnover).
Consider Incentives: Offer small discounts for early payment (weigh cost vs. benefit).
Strategically Managing Accounts Payable (AP)
Controlling Outflows
Negotiate Favorable Terms: Seek longer payment terms with suppliers where possible without penalty.
Optimize Payment Timing: Pay strategically. Take early payment discounts only if beneficial. Prioritize critical suppliers.
Utilize Automation: Use software for POs, invoice matching, payment scheduling. Use electronic payments.
Ensure Accuracy: Implement controls to prevent errors (duplicate payments).
Working Capital Impact
Speeding up AR brings cash in faster. Stretching AP (where feasible) keeps cash longer. Both shorten the cash conversion cycle, improving liquidity and reducing borrowing needs.
Process Discipline Before Automation
Automation works best on well-defined processes. Map workflows, set clear policies, ensure data accuracy, and train staff before implementing automation tools to avoid amplifying existing problems.
Leveraging Assets for Immediate Capital
Tapping into Existing Value
When operational changes aren't enough, a business's own assets can provide quick cash, either by selling non-critical items or through a sale-leaseback of essential ones.
Selling Non-Essential Business Assets
The Process
Identify assets not core to revenue generation (unused equipment, excess inventory, non-critical vehicles, separate real estate, non-core IP). Value them based on market worth. Find buyers (direct outreach, marketplaces, brokers, auctions, liquidators). Execute a formal sale.
Pros
Immediate cash without new debt or equity dilution.
Potentially simpler than selling the whole business.
Reduces holding costs (storage, insurance) for unused assets
Cons
Permanent loss of the asset's use.
Sale price may be lower than expected, especially if rushed.
Potential tax consequences (capital gains, depreciation recapture).
Valuing, finding buyers, and negotiating can be time-consuming.
Selling significant assets might signal financial distress.
Key Considerations
Carefully define "non-essential" to avoid selling needed items.
Understand tax implications before selling.
Get realistic market valuations.
General Requirements (takes about 5-minutes or less to apply online)
680 FICO score (Transunion or Experian FICO model 8.0 or similar)
Less than -15% operating loss in the last year of business
Last 2-Years of filed Business Tax Returns; Last 1-Year of filed Personal Tax Returns
Last 3-months of bank statements; copy of Driver’s License
Business Model Pivots & Restructuring: Changing Course
Definition
A significant, deliberate shift in a core element of the business model (strategy, market, product) in response to poor performance, market changes, or identifying a better opportunity. More than just routine adjustments.
Common Triggers
Stagnant/declining sales or profits.
Shifts in customer preferences/behavior.
Major market disruptions (tech, recession, pandemic).
Increased competition.
Negative customer feedback.
Ineffective pricing or sales channel.
Difficulty scaling the current model
Types of Pivots
Product/Service Pivot: Change core offering (features, quality, new products). E.g., restaurant shifting to delivery-only.
Market/Customer Pivot: Target a different audience/segment. E.g., Repositioning a brand.
Technology/Platform Pivot: Adopt new tech changing operations/delivery. E.g., Retailer moving online; Netflix shifting from DVDs to streaming.
Revenue Model/Pricing Pivot: Change how revenue is generated (subscriptions, tiered pricing, freemium).
Channel Pivot: Change how customers are reached (wholesale to DTC, new marketplaces).
Operational/Value Chain Pivot: Restructure internal processes, supply chains, organization (local sourcing, team reorganization).\
Executing a Pivot
Recognize need (data) -> Analyze market/competitors -> Assess internal capabilities -> Develop new strategy -> Communicate pivot clearly -> Secure funding (if needed) -> Implement changes -> Monitor & adjust.
Pros
Adapts business to survive/thrive in changing conditions.
Unlocks new growth opportunities.
Corrects fundamental flaws in the original model.
Can lead to improved efficiency, profitability, sustainability.
Cons
Inherently risky; new direction might also fail.
Requires significant time, resources, potentially capital.
Can confuse customers, alienate stakeholders, damage brand if poorly executed.
Demands strong leadership and change management.
Involves tough decisions (abandoning sunk costs, workforce restructuring)
Pivoting from Strength: Leveraging Core Competencies
A successful pivot isn't just reactive; it's a strategic correction informed by data and analysis. Often, the most effective pivots leverage the company's existing core competencies—unique skills, knowledge, or assets—applying them to a new market, product, or model where they can create a sustainable competitive advantage.
Navigating Financial Uncertainty
Facing rejection from traditional lenders can be disheartening, but it opens the door to a wide array of alternative solutions. From specialized financing options tailored to specific situations, to internal operational improvements that enhance solvency, to bold strategic maneuvers that reshape the business's future, entrepreneurs have numerous tools at their disposal. The key lies in understanding the options, carefully weighing the pros and cons of each, and choosing the path best suited to the business's unique circumstances, needs, and long-term goals.
We can help you Navigate through the Small Business Financing maze.
The sooner you act, the more options you’ll have.
Schedule a consultation today and take the first step toward saving your business and your future.
Remember, more business debt isn’t the answer. A more effective business strategy is.
Click to setup an introduction meeting to discuss your situation and next best steps.
Bernarsky Advisors
Business Finance and Strategy Advice
Refinance. Restructure. Reorganize.
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WHAT IS THE BEST AND SAFEST WAY FOR YOUR BUSINESS TO DEAL WITH HIGH BUSINESS DEBT PAYMENTS?
It is NOT by stopping ACH payments.
It is NOT by taking on another business loan.
It is NOT ALWAYS a Refinancing
It is NOT by entering into a debt settlement program.
Find out the BEST strategies to get your Business back to where it was
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