What to Do After Your Small Business Loan Application Was Declined
In order to grow and expand, most small businesses all over the world select business loans in some form or the other. There in fact, have been multiple cases where small businesses became global brands like KFC, Adidas, and Microsoft, to name a few.
These are the success stories. However, on the flip side, there are also innumerable cases of business loan denial where a probable borrower is left high and dry even when he requires funds for his bare survival if nothing else.
The inevitable questions that now come to mind are: Why is a business loan declined? What percentage of business loan applications get declined? And what do rejected business loan applicants need to do to mitigate the situation? This article seeks the answers.
Steps to Take When Your Loan Application is Denied
- Meet your lender and ask for clarification
- Improve the financial standing of the business
- Keep alternative loan products in mind
- Be careful when you re-apply
- Appeal if possible (SBA Loan)
Why Business Loan Requests Get Denied
The main reasons for business loan or business line of credit denial encompass a variety of issues spanning from lack of proper business planning to a shortage of collateral that a probable borrower may be able to put up to the lender as security. The following reasons explain in detail what leads to a small business loan denial usually.
No defined business plan
Rest assured no lender will cough up funds unless he/she is convinced of your ultimate business goals and plan. This is because he won’t have a clue about your identity and how you’re going to use his funds.
Therefore, if your business plan doesn’t clearly define your objectives, your prospective market, mission, vision, predicted future sales and profits, be prepared for a business loan denial.
The lack of proper supportive documents like bank and financial statements, returns on income as also identity proof are bound to lead to a denied small business loan.
You’re in the dark about your credit score
A major reason behind a business loan denied is the business owner’s ignorance about his credit score. In fact, nearly 45 percent of small business loan applicants are unaware that their business has something called a credit score.
Moreover, 72 percent of owners of small businesses don't even know where and how such credit scores are available and almost 80 percent admit their ignorance about interpreting their personal scores. This is undoubtedly a serious impediment for loan applicants and usually, result in a business loan rejected.
Your cash flow is insufficient
The more the insufficiency of your working capital, the higher are the chances of a small business loan rejected.
After all, a lender needs to be assured that you will make your repayments regularly after meeting all your operating costs. Thus, if your business has a cash spend on these which is more than the revenue earned, you have a cash flow problem to solve first.
Most lenders tend to be wary of toddlers and first-timers in business. They are more interested in a proven track record and healthy revenues before they agree to support your business venture. By merely putting forward a business idea won’t work with a prospective lender.
No collateral to offer
A lender always wants a guarantee on his return. This is actually some kind of physical asset that is saleable to realize any unrealized dues. So unless you convince him/her that you have certain business and personal assets usable as collateral, you will be in the list of rejected business loan applicants.
High-risk external conditions
Often external conditions influence a lender’s decision to deny a loan to a prospective borrower.
For example, in the food delivery business, spiraling fuel and/or food costs could eat into the borrower’s revenue earnings in the future and make his loan riskier. This is more so as he could even incur losses in future and may be unable to repay his loan.
The debt factor
Small businesses often find themselves in heavy debt situations because of other loans already taken. This creates a poor impression of his financial status and the lender may refuse his application for that.
Your reasons for taking the loan aren’t convincing enough
Many small businesses often apply for loans to decorate their office spaces lavishly or to buy unnecessary equipment.
In the latter category, it’s more of than not that a denied business loan for equipment situation occurs because the lender tends to view the claim as a frivolous one. The flip side of the coin, however, is when a bank refuses a loan, try alternative funding.
Percentage Of Business Loan Applications Denied
Even though plenty of loans are available for small business owners, getting them may not always be easy.
In fact, it often becomes a terribly uphill task for a majority of small businesses because more than 45 percent of such applicants get turned down repeatedly. Moreover, 23 percent of such applicants are unaware of the reasons behind the small business loan declined.
What to do When You Get Declined For a Business Loan
A rejected loan application, however, does not signify the end of the road. You have the option of a merchant cash advance or even business loans ranging between $5,000 and $500,000.
Moreover, there are also special programs that permit merchants to purchase inventory at zero upfront cost, while an alternative lender pays for the full purchase order. The following steps may also be taken should you face a business loan rejected situation:
- Know your credit score first and then judge for yourself if at all you are in a position to apply for a business loan.
- If your scores are poor or even if you have zero creditworthiness, start building or repairing your personal creditworthiness through timely payments. Also, maintain low debt levels, keep every existing credit account open and refrain from opting for multiple lines of credit.
- Solve your cash flow or working capital problem by way of prompt invoicing, creating an emergency fund, expense cuts and instituted late fees. This will convince the lender more to ultimately fund you.
- For early-stage startups, there are business start up loans, small business grants and crowdfunding facilities.
- When faced with a heavy debt situation that could lead to your loan application rejected, ensure that other existing loans are being paid off regularly.
- An alternative route is to negotiate with existing lenders for the reduction of business loan interest rates to pay off any outstanding balances faster. This will establish your honesty with the lender and increase his trust in you for sanctioning the loan.
- Remember, a lender will shell out funds only when he’s absolutely convinced that the money will be invested for the business’s growth and the lender will eventually repay him. So instead of making applications for frivolous reasons, ask for funds to purchase real estate, essential equipment to increase production, develop research & development facilities, software and product development, advertising and for covering seasonal sales variances.
When rejected for business loan, here’s also what you can do:
Meet your lender and ask for a clarification
It always pays to meet your prospective lender face-to-face and ask why your loan application was rejected.
Most lenders do give in writing the reasons for the denial but in case yours doesn’t make sure to ask him/her why. This will help you understand where you were lacking or went wrong and to re-apply in future successfully.
Improve the financial standing of the business
Your business’s interim financials are as important as your credit scores and will heavily influence the lender’s decision.
Thus, improving your figures in terms of the earned annual revenue, business savings and cash flow is important. Analyze your DSCR or debt service coverage ratio and then approach the lender so that he knows that your business has the required cash flow for consistent and timely repayment of the loan.
A debt service figure less than 1 implies that the business’s debts exceed its available cash flow and the loan is sure to be denied. The higher the DSCR, the more are the chances of getting the loan. A ratio of 1.5 and higher is considered ideal.
However, it needs to be borne in mind that even if the business loan has been denied due to a sub-par DSCR, quickly increasing revenue earnings or reducing expenses for re-applying is not easy either. So opt for lower amounts of funding, which if sanctioned will help you strengthen the financial standing of your business.
Keep alternative loan products in mind
Because one prospective lender has issued a business loan denial statement does not mean that others too, will shut their doors to you. For example, you may want to look at invoice financing companies instead if you're waiting to be paid.
Each lender has his own terms and conditions and offers a variety of loan schemes and products. Who knows, you could just fit into one of those many schemes without even having to make any major changes to your business’s finances or credit score. All you need to do is a bit of detailed research to hit the jackpot.
Be careful when you re-apply
When re-applying for a small business loan, ensure at any cost that you do not repeat the mistakes you made earlier and which got your application rejected.
Thoroughly check all supporting documents that need to be submitted; information and proof of your personal identification and the numerical accuracy of all financial and banking statements. Any variance or mistake on this part will surely result in a denied small business loan application and in the age of tax cuts and strong economic prowess because of regulation cutting this is bad news.
What Happens if Denied For Small Business Administration Loan in Regards to Disaster Assistance
Once you receive the SBA denial letter, you have the right to appeal under provisions of Part 121 to the SBA's DAPDC or Disaster Assistance Processing and Disbursement Center within 6 months of the issuance date of the notice of decline.
Getting a small business loan is sitll very doable even if you've been denied. You can even apply for a new loan after 6 months. All current financial statements of the business must accompany the appeal documents.
Should your application be denied a second time, you may appeal to the Director of the DAPDC within 30 days of receiving the letter of declined action. The request must give out specific reasons why you don’t accept the decline decision and why it needs to be reversed.
Jason is a Senior Author for SBL. He has been working with small business owners like you for the past ten years. He graduated with an MBA and began a career as an independent financial consultant for small businesses in his state.