The Next 5 Steps to Take After You’ve Been Denied a Small Business Loan

by Susan Paige on March 19, 2019 · 0 comments

It can be quite discouraging to go through a long and tedious business loan application process only to be denied by the lender. You might feel confused and you might even second-guess all your big plans for your business.

Nevertheless, rest assured that most business owners are able to get funding even though their first attempt failed. Let’s go through the five steps you can take to ensure your next loan application gets approved.

  1. Ask the lender why

Knowing the reason why a lender turned down your application will help you identify and address issues before submitting another loan application. Many denial letters are vague but many lenders are open to providing you a letter explaining the reasons you were denied a loan.

  1. Get copies of your personal and business credit reports

You probably already know that bad credit has a big impact when you apply for an apartment lease or a credit card, or when you buy a house or a vehicle. However, your personal credit score also affects your success when applying for a business loan.

So if your loan application gets rejected, it is imperative that you check not just your business credit report and score, but your personal credit report and score as well to see if there is anything there that is problematic.

Different consumer and commercial credit reporting agencies sometimes have different data so obtain a copy of your personal credit report from all three major report bureaus (Experian, Equifax, and TransUnion) and your business credit report from the three major business credit reporting agencies (Experian, Dun & Bradstreet, and Equifax).

Sometimes, the issue is a simple clerical error on the report. In cases like that, all you need to do is send the agency a letter to have the error corrected.

For many small businesses — especially new ones — the more common problem is lack of credit. If this is your situation, build up your business credit by asking your suppliers, creditors, perhaps even your store’s or office’s landlord to report your payment history to the big reporting bureaus.

  1. Improve the financial health of your business

Aside from checking if you have a bad credit history, lenders will also be looking at your business’s revenue, profits, and outstanding debt. They want to be sure that you will be able to pay back the loan in full and on time.

Lenders typically use the debt service coverage ratio (DSCR) to evaluate your capability to pay them back. Your DSCR indicates if your business is making enough money to pay off your debts.

A ratio below 1 means your business debt exceeds your cash flow. If this is the case, needless to say, your loan application will be denied. To be approved for a loan, you need a DSCR of at least 1.25, and preferably above 1.5.

To improve the financial standing of your business, pay off your debts and find ways to reduce expenses and/or increase revenues. If this is not possible, consider borrowing a lower amount to increase the odds of being approved.

  1. Consider other funding options

Just because one lender rejected your application does not mean that all lenders will. Different lenders have different requirements and different loan products have different terms, so you may not even need to make big changes to your credit scores or your business health in order to secure a loan through other channels.

If the loan you applied for is an SBA loan or a traditional bank loan, explore financing options that are easier to qualify for, such as online loans, invoice financing or business credit cards.

  1. Apply again with extra care

Sometimes loan applications are declined not because of bad credit or poor financial standing of the business, but oversights such as incomplete paperwork, inaccurate information or conflicting figures in your documents. So before submitting another application, make sure to be meticulous in reviewing everything first.

Your loan application being denied does not mean that you will never get the financing that your business needs. Just identify the issues, correct them, and choose the right loan product before submitting your next application.

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