What happens if the lender denies an application for a loan? There’s no reason to be alone. Banks deny 73% of all business loan applications. This is what you must do next.
What should you do if the lender refuses the business credit application
Don’t be shocked if you business loan application is denied. Contrary to popular belief banks can’t make a bet on an excellent business without adhering to strict guidelines. Bank law prohibits them from taking a lend without collateral, regardless of how lucrative the business.
The good thing about a business is that it isn’t over with your first rejected loan. What’s crucial after a loan’s rejection will be what to do following. Here are the specific steps to do.
1. You should get good review from the lending institution
Examine the reasons the reason why your loan was refused. Don’t accept a simple letter or secure message. ensure that you contact an individual. If you don’t know who the loan manager is you should do some research and determine who they are.
That doesn’t mean you shouldn’t don’t read the letter, particularly if it gives you an explanation. Take note of the details of the rejection, including issues like collateral or financial situation.
When you are able to meet the person you want to talk to, keep an eye on the specifics to ask questions. Ask them what would have made the difference, and also which credit reporting agencies you bank utilized to gather information about your company. Decide when and when you’ll be able to reapply and the things you’ll need to do in order to be accepted.
When you’re doing this, make sure you frame the conversation in a positive way. Do not be angry or argumentative, but act as if you are grateful for the decision and want be informed about the decision. You’re seeking an answer to the issue you encounter, not to rethink the decision.
2. Examine the reason the business loan you received was not approved
There are some fairly standard and well-known reasons for rejection of business loans. You can be sure that it is any of these:
- Common reasons for business loan rejection
- Poor credit
- Bad ratios
- Incomplete financials
- The quality of cash flow
- Insufficient collateral
- Too much debt
- Insufficient credit history
Some of these issues are simple to address. Incomplete financials, for instance provides you with a way to submit again with more specific information in order to reverse the decision. A high amount of debt gives you the possibility of paying some of the debts that are already paid off or even find out if there are any mistakes in the financial statements that banks are provided with.
However certain of these issues cannot be fixed easily, which means you’ll need to search for other solutions to your financial issues. For instance, not having enough credit history is difficult to transform quickly.
It may require some searching to find the real reason behind why a lender has rejected your application. As an example I encountered a instance where the manager of the loan blamed a rejection due to a lack of financial projections monthly for the coming five years. The truth is that the bank did not want to work with the people who were the main ones because of the old issues.
3. Take care of your credit report
Do you think that bad credit is limiting your ability to get the loan you want? It’s worth your time to look over your credit report in order to be sure everything is in order. It will also provide insights into what you need to take to improve your credit.
Begin by pulling the copies of your credit reports from the three nationwide credit bureaus, Equifax, Experian, and TransUnion. It is possible to do this for free every year by visiting Annual Credit Report.com. You can request a copy of the credit report utilized for the lender that you applied through.
Examine the information on your credit report, and look for any errors. Every one of the credit reporting companies has a clear procedure to add favorable information and correcting mistakes. Sometimes , you’ll encounter significant errors which can be rectified quickly.
If you do not find any major mistakes, then you must increase your credit score. Concentrate on paying on time and reducing the amount of credit you use and creating the right mixture of debts you have. You might consider investing capital instead of debt and then use it to pay off your debts or negotiate terms with your suppliers.
4. Examine your financial metrics of importance
Bankers utilize typical business ratios, drawn from your financials which include your Profit or Loss, (Income Statement), Balance Sheet as well as Cash Flow Statement. The most crucial ratios that bankers look at include:
Total Debt to Total Assets
That’s your total debt / total assets. A score of one indicates that debt is equal to assets. If you score .5 means that the debt is only 50% of assets. Anything over .5 or more is considered to be a problem for bankers.
Current
Assesses the ability of a company to fulfill financial obligations. It is expressed as the percentage of time that current assets outweigh current liabilities. A high ratio means that the company is able to pay its debtors. A ratio lower than one indicates a possibility of cash flow problems.
Quick
This ratio measures a business’s capacity to meet its present obligations by using its liquid assets. It measures Total Current Assets without Inventory and Total Liability.
Acid Test
The ratio looks a lot similar to that of the fast ratio. This ratio is determined by dividing Current Assets (excluding the inventory and accounts payable) by current liabilities.
Pre-Tax Return on Net Worth
It is the amount of earnings that shareholders earn prior to taxation for every dollar of capital invested. This ratio does not apply in the event that the net worth during the time that is being studied has a negative value.
Pre-Tax Return on Assets
It is the percentage of profit that represents of Total Assets before Taxes. The ability of a company to allocate and manage resources.
Do not forget that the majority of these ratios are driven by similar drivers, like capital sales on credit, inventory, accounts receivable as well as payment patterns. Are any ratios you have appear unhealthy? Check out how you can improve vital financial ratios for your business.
5. Improve your cash drivers
Get back to basics–sell more, make more sales in cash instead of on credit, dispose of unused or outdated inventory, and convince your clients to pay invoices faster. Perhaps you’re running a major campaign to generate new sales or provide an incentive to pay in time.
I worked for an online retailer chain which held a huge sale on inventory to turn the money into inventory; and they offered upgrades and special training for all customers. The denial of their loan application for business resulted in them embarking on a ferocious campaign to increase its financial standing.
In addition, the increase in new sales has provided enough the cash needed to pay debts as well as increase credit scores and financial ratios. This is just one way to improve the flow of cash. To see a complete listing of options, read our entire article on strengthening the flow of cash.
6. Re-evaluate loan strategies and lenders
If your results aren’t too bad and you’re unsure of the bank’s decision to deny the loan application, you could consider other lenders. Banks compete to get small business customers, and occasionally an unsatisfactory case may receive approval from an alternative bank.
If you decide to try it ensure that you make sure you set the scene properly. Be honest about your circumstances as you speak to next banker. They are in constant contact and you shouldn’t hide the facts.
It is also worth looking to obtain venture credit. In this type of loan, you can get funds from venture capitalists or angel investors willing to loan money to entrepreneurs to earn more interest, and typically also an equity kicker. Investors are not governed by bank laws since they are not utilizing the money of depositors which makes them more flexible.
In the case of venture debt, you typically pay higher interest rates on the loan, and you can also give an ownership share as well. A small amount of ownership is known as the equity kicker. For instance, even after the loan is paid, the investors that gave the money go home with just one or two percent of the company as shareholders.
You may also inquire with your bank for SBA-backed loans. SBA is the abbreviation as Small Business Administration, a federal agency that typically offers guarantees in part on small business loans to support small-sized businesses.
7. Find other financing options
There are times when borrowing from a traditional bank won’t work. Perhaps your history of borrowing is not enough or you aren’t able to generate enough sales to demonstrate that your business is viable. If that’s the situation, it might be worth looking into alternative financing alternatives.
It’s a thrilling new world where loans are no longer restricted to traditional. You can look into grant funding as well as technological (fintech) lenders like Kabbage and Ondeck as well as crowdfunding platforms like Kickstarter or Indiegogo. As we mentioned earlier the angel investment model or venture capital as well as even peer-to-peer lending are excellent alternatives.
There are more conventional alternatives like leasing to cut down on expenses for capital, receivables as well as inventory finance. To get a full list of options for financing take a look at our list of 40 tried and tested methods to fund small businesses.
8. Get a co-signer
A co-signer may assist in easing some of the worries banks may be hesitant to lend you. However, co-signing for a business loan is an enormous amount to ask of an friend, ally or family member. The co-signer assumes the risk of a large amount since they will be held accountable for the total amount of the loan in the event that the company fails to pay back the loan.
Perhaps you could offer a deal that is more appealing to co-signers. Are you able to offer a complimentary services or products? Do you have shares of your business? A subscription that lasts for a lifetime? It’s possible, however, they’re not likely. You’ll have to convince your co-signer of your plan as well as perhaps some collateral.
9. Modify your business strategy
Sometimes, there’s no clear reason as to why your bank’s loan was denied. If that’s the scenario, you might have to review your business plan. Review and update the business strategy.
Perhaps you’re in need of growing slow. Concentrate on stabilizing specific areas of your business, then narrow your focus and make it more profitable. It is risky to borrow money, so good financial ratios are beneficial to have. You may have to take a step back and grow your business without increasing your revenue.
Begin by revising your forecasts and milestones. You can eliminate the need to fund until you achieve a particular target for the health of your business. This could be a particular income number as well as the removal of other debt, or even a longer cash runway. Whatever your goals in the first place, your goal will be to help make the company better and more ready to apply for and make use of financing.
Do you need help writing and revising your plan for business? You may want to review our comprehensive business plan guide.
What happens if your loan gets denied once more?
Business owners all have stories about their disappointments and setbacks. However, in this instance there’s no way that the rejections of business loans are recorded in a permanent file and affect you for the future. Your credit score shows that your credit has been examined.
It displays loans you’ve used but not loans that you attempted to get but didn’t succeed. Follow the steps that apply, then attempt again. Also, you can try using different banks or funding sources. Check out our guide to financing your business to get a complete overview of your options for funding as well as ways to boost your odds.
Small Business Loan FAQ
What are the main factors banks look at when they approve loans?
The majority of loans are based on credit scores and the financial condition of business’s owners more than the actual business. It is almost mandatory to support the business loan application by securing an individual guarantee from an owner(s). My business was very profitable and we sold an average of $4million annually without debt, and we could not obtain a credit line for business without securing a lien on our home.
What percentage of small business loan applications are accepted?
According to Fundera According to Fundera, the small-business the rate of rejection for loans is 73%, and just 43% companies are even able to apply for financing.
What is the typical business amount of a loan?
According to Shopify according to Shopify, the typical small-sized business loans amount for the short term is approximately $20,000. The average medium-term business loans value is approximately $110,000. The median SBA credit amount for loans is 107,000. The typical commercial line of credit amount is $22,000.
Is being denied an loan affect my score on credit?
According to Experian, one the three main keeper of credit score information, the rejection of business loans does not impact your credit score. However the details of your credit score indicate that an inquiry into your credit history was conducted.
You can make an application for the exact same credit again?
It is generally recommended to wait 30 days prior to making another application following the time your business loan application has been rejected. This implies that you corrected the application or altered the information or performed some other step to improve the quality of your application.
Are you able to apply for several loans at the same time?
Experts on credit are of the opinion that it’s not an ideal option to apply for multiple loans simultaneously. This will show in your credit report as multiple requests at once.
