You’ve approached your lender and submitted a loan application only to find out you’ve been denied. This is, unfortunately, a common reality for many small business owners. In contrast to how they handle applications for a personal loan or credit card, lenders are much pickier when it comes to approving financing for small businesses. They see loans to these enterprises as riskier bets, since there’s a good chance they might fail and the lender will be required to seize assets or foreclose on property to get its money back.
Lenders may reject your small business loan for a host of reasons. Maybe you forgot to completely fill out the application, only providing two years of tax returns when three were required. Perhaps your personal credit history has a few recent black marks. Possibly your business has struggled with its cash flow recently.
Regardless of what’s behind the rejection, you need to request an explanation. Surprisingly, nearly one in every four of business owners turned down for a loan don’t know why they were rejected, according to a study by Nav. That’s unwise; only by asking your lender will you learn why they rejected you, and what’s required to correct the application. And don’t worry about your lender staying mum, most lenders are more than willing to tell you exactly why your loan application was rejected.
While some issues are easier to fix than others, there are still remedies for virtually any issue the lender may have raised. Here’s advice on solving some of the most common.
Poor or No Personal Credit
It may be a business you’re seeking to finance, but your personal credit score is of high interest to lenders when you apply for a small business loan. They consider the way you’ve managed your personal finances to be a strong indicator of how you might manage your business’s affairs in the future. Lenders want to see borrowers who have an established history of repaying their debts.
While it takes years to truly fix a low credit score, you can take steps now to show lenders you’re serious about getting your act together. First, identify all outstanding personal debts, along with the interest rates and any fees they may be incurring. If you’re unsure if you have a full accounting of your debts, get a copy of your credit report; you can get one free from annualcreditreport.com.
Second, make a plan to tackle your debts. You can sometimes negotiate a lower payment or interest rate on the debt you owe, since creditors may be happier to be repaid in a stream of smaller payments than to wait for the full amount and worry it might never arrive. You can also look into refinancing your debt through a balance transfer credit card or personal loan, which might get you a lower rate and a single monthly payment. Regardless of how you do so, make sure you’re actually making a dent in your debt every month.
Weak Cash Flow
Most lenders will require cash flow statements and projections, but they may also look at other tell-tale signs of your business’ cash flow, such as the activity in your business’s checking account. If you have a low average balance, or a slew of overdraft charges, non-sufficient funds fees or bounced checks, lenders may decline your loan application, since these are indicators that your business isn’t financially healthy.
According to findings from the Federal Reserve, more than a third of small businesses faced challenges in paying their operating expenses in 2018. Gaps in cash flow are a common cause of these struggles. One way to fix the problem is to create a budget for your business. This will help separate necessary expenses from ones that are dispensable. Cut out unnecessary expenses where you can and set this money aside in your business checking or savings account. Any decent accounting software will help you make a budget.
If getting paid on time from your customers is an ongoing issue, consider offering a small discount for invoices that are paid upfront. While this means you forgo receiving the full amount you’re owed, it means you’re likely to be paid more rapidly and more regularly, which automatically boosts your cash flow. You can also negotiate trade credits or lines of credit with your vendors, which can help even out your accounts payable cycle.
Little to No Revenue or Profitability
As with cash flow, lenders want to see businesses that generate both revenue and profits. Since profit is the difference between your revenue and operating expenses, you’ll want to focus on increasing your revenue and decreasing your expenses. Since we’ve already addressed the expenses part in the cash flow section, we’ll look at how you can increase your revenue to improve your chances of getting a loan.
A few different strategies, used alone or in tandem, promise to increase your revenue. One is to focus on your marketing efforts. A great marketing campaign doesn’t necessarily have to be expensive, but it does need to be well thought-out. Run test ads and promotions in a small market to see what works well for attracting new customers.
A second strategy is to review your pricing. How are you priced compared to your competition? You may want to raise or lower your prices, depending on what you find in the market. Consider also if running discounts or coupons might be an effective tool for expanding your business.
Third, consider expanding your offerings and distribution. If you’re serving only a small geographic area via physical sales, weigh if you could increase sales by selling online. Alternatively, maybe you could bundle current products and services or expand your offerings with new product that complement those you’re already selling.