What to Do If You’re Denied a Business Loan

If you’re denied a loan, you need to use the experience as a learning opportunity and move forward to apply for another business loan. The best way to achieve this is by asking the lender for an explanation detailing the reasons your loan was rejected. Once you determine why your business loan was rejected, you can avoid making the same mistakes moving forward.

Follow the following practical advice for communicating with your lender after your loan is denied to help you get a loan sooner rather than later.

Reasons for Business Loan Denial

A lender can deny you a business loan for various reasons, but mostly due to a low credit score. Other reasons for loan denial include:

  • Relatively new to business: Relatively new businesses most likely lack enough credit history to qualify for business loans. To improve your creditworthiness, always ensure that your vendors or suppliers report your payments to business credit agencies.
  • Risky industry: Some industries have a high rate of failure; for example, restaurants and gambling. As such, lenders may not be willing to finance your business, but not to worry, there are lenders out there who specialize in your industry.
  • Lack of collateral: You might have collateral, but if the lender deems it inadequate, they can easily turn you down. If that’s the case, seek alternative financing options such as unsecured loans.
  • High debt utilization: Lenders prefer financing borrowers who use up to 30% of the credit available to them. If you have already used over 80% of the credit available to you, lenders might see you as a high risk and deny your loan application.
  • Poor cash flow: Cash flow always determines the success of your business, and if you have a spotty cash flow, lenders can easily deny your loan application. To improve our cash flow, examine and improve your cash management skills.
  • Asking for too little money: Some banks don’t want to offer small loans because the servicing costs are not worth it for them. Carefully examine your business needs and apply for a higher sum, but if you don’t need more money than what you are asking for, seek out micro-lenders or other lenders who specialize in providing small loans.

Script to Ask the Lender

While all lenders are different and have varying requirements, you can learn a lot from each one that can significantly improve your loan approval chances. As such, it is vital that you make inquiries from the lender about the factors that influenced your loan denial.

Listed below are some questions to ask the lender to help with your next loan application.

Q1: What exactly caused my business loan rejection?

The answer to this question will help you know exactly what the problem is and what you can do to get accepted for your next loan application. As seen above, there are numerous possible reasons for your rejection, and knowing the exact reason could help you decide the next step.

Q2: I need this loan as soon as possible, is there anything you can suggest to help speed up the process?

Anyone who has applied for a business loan knows that the process is not instant. The best course of action is probably applying with another lender immediately, and this time be as thorough as possible, paying special attention to the cause of your rejection.

Q3: Where do I start?

This question can be challenging, especially when your application has been rejected due to a poor credit score. You can be conflicted about where exactly to start, whether with improving your credit score or seeking another loan.

You need finances to help improve your credit score, and lenders won’t approve your loan application with a low credit score. The best way forward is to seek an appropriate loan, for example, a Small Business Administration (SBA) loan.

Q4: Is it okay to use my house as collateral?

You can put your house as collateral, but you have to be adamant about your payments to avoid losing it. Also, make sure that all agreements are in writing.

You might be dealing with a salesperson, for example, and they convince you that the lien will be released after a certain duration. Salespeople will say anything to get you to sign up, so the safest choice is having everything in writing and making payments accordingly.

Q5: If my business doesn’t have enough collateral, will the lender automatically ask for personal assets as collateral?

In most cases, lenders will avoid approving loans without enough collateral. However, when a lender approves your loan, and you end up defaulting on the payments, your personal assets may be used as collateral.

Steps to Take After the Rejection of Your Loan Application

There’s no reason to give up your business goals and dreams after your first rejected loan application. You can still acquire financing with subsequent applications and eventually run a successful business.

The secret is in figuring out the reason for the rejection and working towards making your business more loan worthy. Find below a few tips on how to achieve that:

  • Request an explanation from the lender: Once a lender denies your loan application, you cannot sway their decision. So, the next best thing is to ask for an explanation detailing the reasons for the denial.
  • Assess your credit reports: As a small business owner, your personal credit score has a major impact on your ability to access a small business loan for your business. So, check both your personal and business credit reports and run them by the three main reporting agencies: Equifax, TransUnion, and Experian.
  • Improve your business’s financial position: Make sure that our business has good annual revenue, cash flow, and savings. Check your debt service coverage ratio (DSCR) to assess whether your business’ cash flow can make steady loan payments.
  • Seek alternative lenders: Lenders have varying loan application requirements, and you can still obtain a loan from a different lender after being denied by another.
  • Carefully fill your next application: For your second loan application, pay attention to every fine detail to avoid simple mistakes and oversight that could lead to a second denial — triple-check everything, including the documents to attach and your identity information.

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