You can walk into a bank with reams of papers proving that your small business is credit-worthy. Even despite having a good business plan and good credit, you might walk out of the bank without hopes of getting funding for your business. Small business financing has been a challenge for many years.
There are a number of reasons why a bank might not give you a loan. At an individual level, even if there is a reason, it is a disheartening experience to be denied a loan. You might ask yourself questions and wonder whether the business idea was even viable in the first place.
Although many entrepreneurs were denied loans by banks when they needed funding the most, they later emerged as victors. They got loans from subsequent applications in other alternative sources. As a result, they were able to grow their businesses and increase revenue, leading to increased profits.
Therefore, do not get discouraged by the first ‘NO’ you get from a lender. It could be they aren’t even close to being a good lender. In fact, you can even be happy you didn’t get a loan from them. Here are five steps to take after you have been denied a business loan by a bank:
Top 6 Tips to Small Business Financing after being Turned Down by a Bank
Find Out Why You Were Denied a Loan
The first step is to find out why you were denied a loan. Getting such information is not difficult because lenders are obligated to tell customers why they are denied loans. It is a requirement by the federal law that they provide the reasons in writing.
The Equal Credit Opportunity Act requires lenders to give reasons for credit denial in 30 days. The law requires the reasons stated to be specific and easy to understand. However, if a lender is not able to provide the information, you must be guided on how to find it. The act also states that if a credit report is used to decline a business loan, a solution must be provided.
It is your right to know and clearly understand why you were denied a business loan. If you do not understand the reasons, consult with those involved to find out more information to help you address your specific concerns. You can then successfully reapply for another loan.
Check Your Credit Reports (Personal and for Your Business)
Sometimes, banks deny small businesses loans due to poor credit history. Although your current status might be good, your general credit score could be low. Therefore, a lender would have no choice but to deny your small business the loan you apply for.
If you are running a small business, you should know better how your personal credit can affect your credit score. For example, getting a house on lease or buying a car on credit can reduce your chances of getting a business loan. If a loan was denied due to poor credit, you are entitled to a report from the credit reporting agency.
The credit guarantee is provided in 60 days. Therefore, don’t waste time. Read through the report once you have it to determine any discrepancies that may exist. Whereas some occur due to arithmetic errors, others might result from fraudulent activities. It could also be that a creditor mailed your bill to a wrong address and it never reached you.
The first step to dealing with such errors is to immediately report them to the reporting credit agencies. Write separate letters to the agencies, explaining the error and make sure you attach relevant documents. The credit agency then does investigations to determine the source of the errors to correct them. It then contacts the lending firm that denied you a loan on the same.
Improve Your Business Finances
Apart from your credit status, there are other factors that influence lenders’ decisions to approve or disapprove a loan. Your business cash flow, savings and annual revenue can also affect the possibility of getting a loan. Make an effort to improve your financial status or choose another loan product.
A lender uses your debt service coverage ratio to determine whether your business is in a position to make repayments. It is of importance to know how to calculate this ratio. If it is less than one, it means your business cash flow is not enough to finance loan repayment.
With a low debt service coverage ratio, a lender is bound to deny you a business loan. Therefore, it’s important to do what it takes to increase your revenue. However, given the short time, increasing your revenue might not be an option. Try to apply for a reduced amount of loan and use it to grow your business and increase revenue so that you can borrow more in the future.
Get a Second Opinion
Some lenders have departments whose sole roles are to reevaluate loan applications. Once they receive credit reports from the relevant agencies, they investigate and evaluate your credit status and correct them. Do follow up and get a second opinion from your lender after reevaluation. You might just get the business loan.
Consider Alternative Funding Sources for Small Businesses
Explore your options to obtaining a small business loan. Find out other sources of financing for small businesses such as government grants or invoice factoring.
Many small business owners have been denied loans, not once, not twice. However, despite your experience, do not be discouraged from seeking alternative financing to grow your business. Solve the problems your business might be experiencing and take any of the above steps to get back on your feet and drive your business growth.
Contact us to find out how we can finance your business operations!