In our new guest post series, we’ll be bringing you advice and tips from industry experts on the other, sometimes non-marketing-related issues affecting local business owners. Today’s post comes from Meredith Wood, the Head of Content and Editor-in-Chief at Fundera.
Okay, your loan request was denied; you’re probably feeling a bit stressed and overwhelmed and you may even feel like throwing in the towel. But if you do that, you wouldn’t be the resilient entrepreneur that got you to where you are today; the one who doesn’t take “no” for an answer.
All hope is not lost. If you were rejected for a small business loan, the first thing you’ll want to do is consider the reason for rejection. Is your credit score up to par? Does your business plan need work? Does your company have enough cash flow?
Whatever the reason, the reality of the situation is that you need money for your business and your first attempt at getting it didn’t go as planned. So let’s talk about what you should do next.
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Verify The Cause
You may have a sneaking suspicion as to why your loan application was denied. But, you’ll never be certain if you don’t ask. Reach out to the lender and see if they can give you as much insight as possible as to why your application wasn’t approved. The more specific, the better. Once you get this information, you’ll know exactly where you need to turn your attention to improve your chances of securing a future loan.
There’s all sorts of reasons your application can get denied. Below are a few of the most popular, and what your business can do to improve them.
If the problem lies with your credit score, improving it could help turn your application rejection into an application acceptation. Improving your score won’t be an overnight fix, but there are a few ways to give it a quick boost.
First, you’ll want to know what your credit score is, so pull your report from the three major credit reporting agencies (Experian, TransUnion, and Equifax). Remember to pull your credit report every six months or so to check for any errors.
Errors are more common on a credit report than we’d like to believe, but it could be the reason you have a low score. If you can detect and remove any errors, you’ll be able to give your score a significant boost.
Paying down any current balances and raising your credit limit will also help. Most importantly, however, be sure to pay your bills on time!
Lenders care about your business’s cash flow because it shows them whether or not you’ll be able to cover your current expenses alongside your loan payments. To play it safe, they’ll want to see a little buffer too. Most lenders will figure out if your business can handle the expected loan payments by using something called Debt Service Coverage Ratio. This equation essentially tells lenders how much cash you have to service debt. To calculate, you need to figure:
Annual Net Operating Income + Depreciation & Other Non-Cash Charges /Interest + Current Maturities of Long-Term Debt
If your debt service doesn’t exceed 1, that means you’ll have more debt than cash flow. So, anything over 1 is where you want to be, and the further over 1 the better! If you need to get your DSCR up, you’ll need to get more cash coming into your business, or ask for a lower loan amount.
Age of Your Business
If your company is just starting out, lenders may be leery offering you a loan because they’re unable to see any proven success. Unfortunately, there’s nothing you can do about that fact except wait. After two years in business, more loan options should open up. In the meantime, focus on improving your credit score and cash flow, to make sure your application is as strong as possible when that time comes!
Just Because You Got One No, Doesn’t Mean They’re All No
The other thing to keep in mind is that just because one lender says no doesn’t mean they all will. For example, there are dozens of different types of loan products you can find that are meant to service different type of borrowers. Some lenders accept lower credit scores, others might use equipment or invoices to collateralize the loans. Either way, you have options so be sure to shop them. You can also consider getting a business credit card or more wisely utilizing the cards you have now.
Just because you were rejected for a loan the first time around does not mean you won’t be able to get one. Focus on opening up your options and improving your application, and you’ll be headed in the right direction. The most important thing to remember, however, is to never give up.
Meredith Wood is the Head of Content and Editor-in-Chief at Fundera, an online marketplace for small business loans. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith manages financing columns on Inc, Entrepreneur, HuffPo and more, and her advice can be seen on Yahoo!, Daily Worth, Fox Business, Amex OPEN, Intuit, the SBA and many more.