Rejection always hurts, and when it’s from the bank on a small business loan, it can sting a little bit more than it did in high school. Loans are the lifeblood of most small businesses, and without them, the company could crash and burn. In fact, according to the Small Business Administration, 27% of the small businesses surveyed stated they weren’t able to receive the funding they needed to expand their businesses.
However, there is hope. Many businesses have been rejected only to recover and secure the financing they need on the next application. Here are our tips to help you recover from a rejection.
Determine the Reason
First thing’s first, you need to be able to pinpoint your misstep to correct it in the future. Most lenders will give you the reason that your application was denied and it is usually one of two issues:
- Low FICO Score
- Not enough revenue
Before lending to a small business, just like any loan, they want to ensure that you have a solid history of repaying your debts on time and in full. If your business and personal credit scores are less-than-stellar, lenders will perceive you as a risky investment.
Additionally, lenders want to know that borrowers can make the minimum monthly payments on the small business loan. This is where your business’ cash flow comes into effect – they’ll calculate your debt to income ratio to see how you would be able to handle the monthly payments.
Correct the Problem
There are both short-term and long-term solutions. You can’t fix your credit score in a week, but if you make it a priority, over time, you’ll be able to improve it. In the short-term, you can, first of all, ensure that your credit report is error-free. It happens more often than you would think as 23.17% of all complaints to the Consumer Financial Protection Bureau in 2016 were about credit report inaccuracies.
Also, to improve your credit rating, you can take steps to pay off your debts to improve your debt to income ratio which will make you look more favorable to lenders.
To improve your revenue streams and to show the lender that your business is bringing in enough money to cover expenses and the loan payments, you should do your best to reduce expenses while increasing your profit margins. Improving cash flow can be a challenge for some small businesses. However, many are finding success after putting all of their attention and efforts into the process.
Other Things to Consider
There are a few things you can do to improve your odds of securing a small business loan, and are intended to make you appear more trustworthy as a borrower.
You can make a sizeable down payment on the loan to show that you’re serious about repaying the loan. You can also get a cosigner with an excellent credit score to make you appear more trustworthy. However, the cosigner would be on the hook for the loan as well, so ensure that you can confidently make the payments.
If you have a low FICO Score, you should also look into alternative financiers that could provide you with financial options. Big banks aren’t the only lenders out there. Additionally, a low credit score won’t necessarily take you out of consideration with alternative lenders.
What to Do Before Re-Applying
Before potentially going through the frustration and wasted time of a loan rejection again, you need to take a look at yourself and your businesses from the lender’s point of view; are there any red flags?
We recommend taking a hard look at your credit report. Even asking a lender’s advice about any problems they see. It may seem scary to ask them to point out problems, but the issues might arise when you re-apply for the loan anyway. So, it’s better to know beforehand.