Having your loan application rejected by a bank can be discouraging, but it doesn’t mean you should give up your hunt for financing. With credit tight and the economic future uncertain, many small businesses have been feeling the sting of rejection lately. If your small business loan application has been turned down, here are some things you should do to get back on track.
1. Investigate and Ask Questions
The first thing you should do when you’ve been rejected for a loan is get a copy of your credit report. If you submit, in writing, a request for a report within 90 days of the rejection, the credit bureau that the lender contacted when evaluating your application must send you a copy of your credit report within 60 days of receiving the request. Having this information can help you to see where your company’s weak points are and what you can do to strengthen your credit worthiness.
It’s also worthwhile to speak with the loan officer who was in charge of reviewing your application to ask why you were declined. While this conversation can be awkward, they’re in the best position to tell you what you can do to improve your chances of success in the future. In some cases, your persistence may even be enough for them to give your application another look, or pass it on to a higher-up who may have more discretion when it comes to approving loans.
2. Review Your Business Plan
Your business plan is a major component of your application. This document is what your bank uses to understand your business, your growth prospects, and your ability to repay. Make sure your plan clearly indicates how the loan will be invested and demonstrates that you’ll be able to make a decent return on the investment. If necessary, hire a professional accountant to review your figures.
3. Minimize Risk
Being too risky is a top reason for loan rejection. Do whatever you can to show a loan officer that your business is a solid and safe investment. This can mean paying down existing debt to manageable levels or taking out sufficient insurance to cover your business. It also means showing that your business model is flexible, so that if one part fails or something goes wrong, you have a backup plan with a variety of options that lead to success.
4. Shop Around
Just because one bank didn’t approve your application doesn’t mean another won’t. Big banks tend to have low approval rates, so if you applied with a big bank the first time around, try looking at smaller, community banks or even credit unions. Smaller banks often have the resources to take a closer look at your application and judge it on more flexible, subjective measures than big banks, who generally take your credit score and other figures, feed them into a program, and get a response based just on the numbers.
Take the time to speak with a loan officer before submitting a formal application to see how much interest they have in your business and get a feel for your prospects at that bank. You may even have a different experience with different loan officers at the same bank, so don’t be afraid to stop by more than once to talk with different people. You can also apply to get an SBA-backed loan, which provides a loan guarantee for small businesses whose applications fall just short of a bank’s requirements.
5. Try Alternative Financing
If you’ve reviewed your application and, even with some finessing, it still isn’t up to the standards necessary to secure a traditional bank term loan, it may be time to look at alternative financing.
Options such as accounts receivable factoring and financing, leasebacks, purchase order financing, or merchant cash advances can get your business the injection of capital it needs with much less stringent requirements on your creditworthiness. These options will generally cost you more, and some are more appropriate for certain types of businesses than others; but if you need the funds, they can be a quick and convenient way to improve your business cash flow.
