Most small business owners don’t jump into their entrepreneurial dream because they are experts at financing a business. As a result, it’s not uncommon for a loan application to be rejected. Sometimes it could be the creditworthiness of the business, the criteria of the lender, or simply not completely understanding what the lender considered when they evaluated your loan application.
With that in mind, here are four things you can do to regroup, start over, and improve the odds for next time:
1. Start at the beginning: The first thing lenders want to know is that your business has the ability to service debt. This is why they ask about things like revenue, time in business, cash flow, and your liabilities. They want to validate that you can repay a loan and that you’ve been in business long enough to have a track record. Different lenders have different requirements. For example, the local bank wants to see several years in business and annual revenues closer to $1 million than $100,000. On the other hand, many online lenders are looking for at least a year in business, a minimum threshold of $100,000 in annual revenues, and the ability to demonstrate you have the cash flow to make the periodic payments.
Advice: Make sure you understand the loan criteria before you apply to validate for yourself that you meet the minimum requirements regarding time in business and revenue.
2. Honestly evaluate your track record: Lenders use both your business credit profile and your personal credit score to validate a track record of consistently meeting your financial obligations. Banks for example, prefer to work with business owners with a personal credit score of 700 or better (although they will sometimes go as low as 680 if other factors are in place. The SBA will work with your business if you have at least a 650 personal credit score, and there are other lenders that will approve an application if your score is a little less than that if you can demonstrate a healthy business with the ability to make repayment. They use this historical data to make assumptions about what you will do over the term of the loan based upon how you’ve met your financial obligations in the past—your credit profile (both business profile and personal credit score) is an important part of that evaluation.
Advice: Get familiar with, and regularly monitor, your business credit profile and start monitoring your personal credit score. It’s human nature to positively impact the metrics we pay attention to, so it makes sense that regular (even monthly) review of your profile will help you take action that will show up as positive improvement. What’s more, inaccuracies can negatively impact your profile. Fortunately, the credit bureaus have processes to correct any inaccuracies. Building a strong profile doesn’t happen overnight, but with effort you can start moving the needle in a relatively short period of time.
3. Know the numbers: In other words, have a solid understanding of some of the basic metrics that will describe the health of your business from a financial perspective. It’s important to understand your revenue, your cash flow ratios, your income statement, and your costs of doing business. I once spoke with a lender who said, “If I can tell more about the health of a business by looking at the numbers than the business owner, I’m not going to give them a loan.”
Advice: Fortunately there are a number of resources to help you better understand the business financial metrics of your company. You can start by thinking of your accountant in a less transactional way and leverage their expertise in a more consultative way. Ask them to explain anything you don’t understand and seek their advice regarding how to positively impact some of those numbers. They can be a valuable resource to help you build a healthy and thriving business. And, armed with a better picture of what’s going on financially within your business, you’ll be able to make better informed decisions—including decisions about small business financing.
4. Loan purpose matters: Why your business is borrowing drives a lot of other factors. For example, borrowing to purchase a new building, a piece of heavy equipment, or inventory are all different needs that don’t all fall into the same financing bucket. A long-term investment like financing the purchase of business real estate requires a different type of financing than filling a short-term need like financing the purchase of quick-turnaround inventory.
Advice: Before you approach a lender, be sure you can articulate your loan purpose. It will help you make decisions about loan amount, appropriate term, the interest costs of the loan that make sense, and whether or not the total dollar cost of the loan is appropriate to the loan purpose. It’s not recommended to borrow more than what you need or borrowing for purposes that don’t either add value to your business or increase your ROI.
Use a rejected loan application as a learning experience to improve your application for next time. If you’d like to learn more, you can check out our guide to small business borrowing or our complete guide to small business loans.