Starting a small business is a difficult and lengthy process, but it can also be rewarding once you get your business off the ground. Most small business owners rely on small business loans to get started. If you are denied a small business loan, then it can make you feel defeated but you have other options. Do not lose faith if you are denied a small business loan. Just because it is the most common way to start a business does not mean it is the most effective method.
Among those other possibilities are different types of loans to pursue as well as ways to improve your appeal to small business lenders.
Regardless of the options you take, your first step after being denied a small business loan is to find out why your request was denied. Knowing the answers to this pivotal question helps you to strategize your best options for moving forward from this setback. The most common reasons small business owners are denied loans are poor credit, insufficient cash flow, insufficient time in operation, inadequate collateral and inadequate preparation. In addition, outside circumstances having nothing to do with your own creditworthiness can affect the decision. Such factors include competition, location, economic trends and experience in the industry.
Contact the Lender
The best source for the answer to why your application for a small business loan was rejected is the lender who turned you down. After being denied a small business loan, contact the lender him or herself to politely ask why your application was rejected. You are not trying to convince the lender of anything in this conversation or change his or her mind, so resist the urge to defend yourself. Simply ask and calmly listen to the answer you are given.
In most cases, the lender sends you a letter of explanation for you to read describing their reasoning. This information can help you identify where to focus your efforts at improving your creditworthiness in lenders’ eyes. Having the information in writing is preferable since you do not have to contact your lender in the future if you want to go over their reasoning again.
Fix and Improve Your Credit
You can follow information from your lender with a close review of all your credit reports, both personal and business. Look both for errors you can easily report and get corrected as well as for legitimate issues you can work to remedy.
If you find an error on a credit report, then dispute it immediately. Be ready to provide proof of your claim, such as a payment stub proving you made a payment on time reported as unpaid or paid late, upon request. Be sure to check all three of your credit reports — Equifax, TransUnion and Experian — as different lenders review different ones, and the information on one does not necessarily match the information on the others.
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In addition to outright errors in your credit report, there might be favorable elements of your credit history missing from a report, such as a store card with which you are in good standing not appearing on a report. If you can prove the favorable item, then you can report it to the given credit reporting agency yourself and request the agency add it to your report.
Be sure as well to check your business’s credit reports in addition to your personal ones. If, like most small businesses, yours has not built up much of a credit history, then place some focus on remedying this. Start building up your business’s credit by asking your current creditors to report your history of payments to the major business credit reporting bureaus, including Equifax and Experian as well as Dun & Bradstreet. Possible creditors to ask include the landlord of the property where your business operates and the vendors of your business supplies and services.
Improve Your Business’s Financials
Your credit score and history may matter most to lenders in qualifying you for a loan, but your business’s financials also matter. These financials include your business’s annual cash flow, savings and revenue. The better the records you keep of these factors, the more empowered you become to effectively improve those factors and present them confidently before lenders.
One trick for improving your business’s financials, whatever their condition, is to calculate what is known as your Debt Service Coverage Ratio (DSCR). The formula for calculating your business’s DSCR is as follows: Divide the sum total of your annual net operating income, depreciation and other charges besides cash by the sum total of the interest you pay and the maturities on your current long-term debt. The result tells you whether your business’s cash flow can successfully exceed its debt.
A DSCR of under one indicates your business owes more money than its cash flow can cover. Most small business lenders seek a DSCR of 1.25 to 1.5 or higher. If your DCSR is unsatisfactory, then you can improve it by either increasing your cash flow or decreasing your debt, ideally both. In the meantime, you can often get approved for a small business loan for a smaller amount.
Alternative lending can be a minefield, filled with as many detriments to your business as benefits. To succeed with alternative small business lending and avoid being taken advantage of by a scammer requires knowing how to evaluate alternative lenders and loans.
One option with little risk is to seek alternative loan products, such as a business credit card, offered by the same lender who just turned you down for a small business loan. If you have done your due diligence in researching the legitimacy of a lender already, then you can presume other loan products from that lender are backed by the same legitimacy. Other lenders may simply have lower standards for small business loan approval, although make sure the interest rate and loan terms are not unreasonable.
Above all, when considering any loan product, be clear on the exact interest rate and whether it is fixed or adjustable. If it is adjustable, then make sure you know the terms and limits under which it adjusts. Be clear as well on the monthly payment amount and all possible fees and penalties you may be charged.
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