Let’s say you put together a business plan. You did the math to figure out exactly what you needed. You researched your small business loan options, diligently completed the paperwork and even did your little “good luck” dance as you clicked the “submit” button on your application. But then, your worst fears came true: You were denied that small business loan.
Let’s face it: There’s almost nothing quite as discouraging for an entrepreneur as seeing your business dreams halted by the decision of a single lender. You might feel rejected, have no idea what to do next and even start to question whether your grand business plans were ever meant to come true in the first place. But here’s the good news:
Of the many entrepreneurs who are denied a small business loan after their first application, most do go on successfully obtain financing with later applications. The key is to figure out why your application was denied, take steps to improve your credit and financial standing and choose the right loan product for your business — before trying again.
Don’t let a single denial hold you back from pursuing your small business goals! Here are the five steps you can take right now to ensure that your next business loan application results in a resounding yes.
1. Request an explanation from the lender.
Once a loan officer has given your application that red stamp of denial, you’re not likely to change his or her mind. Most lenders, however, will be willing to provide a letter of explanation detailing the reasons that your business loan application did not meet their requirements.
Understanding why you’ve been denied a small business loan will be critical as you seek to successfully re-apply in the future — and the answer might not be as obvious as you may think. A letter of explanation from your lender will allow you to address those specific concerns before seeking funding again in the future.
2. Check your business and personal credit reports.
If you’ve ever bought a house or a car, or even applied for an apartment lease, you’re likely very familiar with your personal credit score and the impact it can have on your access to financing. But did you know that as a small business owner, that personal credit score also weighs heavily on your access to a small business loan?
That’s why, upon being denied a small business loan, one of your first steps should be to check your personal credit report and score for any discrepancies or forgotten financial woes that may have contributed to the denial.
Be sure to check your credit report with all three major reporting agencies — Experian, Equifax and TransUnion — as different bureaus may receive and report different information about your credit history. Should you find any errors on your credit report, reach out to the agency, in writing, to have the information corrected immediately. You don’t want an error to impact your ability to get a loan.
Along with your personal credit, your business also has its own credit report and score, which factors into lenders’ criteria. For most small businesses, however, the challenge of business-credit reporting most often stems from a lack of credit — particularly if your business is relatively new or you’ve never sought a loan before.
Work to build up your business credit by asking vendors, creditors or even the landlord of your retail property or office space to report your payment history to major business credit reporting services, including Experian, Dun & Bradstreet and Equifax.
3. Take steps to improve your business’s financial standing.
While your business and personal credit scores will typically be the most influential factors in a lender’s decision process, the internal financials of your business — particularly the strength of your annual revenue, cash flow and business savings — will also be considered.
Taking an objective look at these factors from your lender’s point of view may help you to determine what steps you can take to either improve your financial standing or choose a loan product that will be a better fit.
The best way to do this? Take a look at what’s called your debt service coverage ratio, or DSCR, for short. This simple formula is the tool that lenders use to determine whether your business has the necessary cash flow to make your loan payments consistently and on time.
Don’t know what a DSCR is? Here’s the basic formula you’ll need to calculate your debt-service coverage ratio, including your anticipated loan as part of your calculations:
Annual net operating income + depreciation and other non-cash charges
Divided by interest + current maturities of long-term debt
A debt service of less than 1 indicates that your business’s debt will exceed available cash flow, meaning your loan will surely be denied. Most lenders look for a higher DSCR — at least 1.25 — with a ratio of 1.5 or even higher being ideal.
Even if you’ve been denied a small business loan because of a low DSCR, you may not be able to quickly increase revenue or reduce expenses in order to re-apply.
If this is the case, consider seeking a lower amount of funding — at least at the start — in order to increase your chance of approval until you can build up your business’s financial standing.
4. Consider alternative loan products.
We can’t say this enough: A denial from one lender on one loan application is not a “no” for all time. Variations between lenders’ standards, the requirements different loan products have and the amount and terms of your financing can often mean that even without making major changes to your credit or your business finances, you may still be able to obtain a small business loan relatively quickly if you explore your options.
5. Apply carefully the second time.
Beyond the challenges of bad credit or your choice of the wrong business-loan product, there are simple mistakes or oversights on the business loan application that could be the reason you were denied.
Did you have all of the right documents? Did you triple-check your identifying information and every other aspect of the application form for accuracy? Did your balance sheet and profit and loss statements match the business bank statements and tax documents that you provided?
This is the time to get a second set of eyes on everything that you submit so that you don’t risk a second round of frustration.
Being denied a small business loan is a reality that many business owners face, particularly after their first application — but it is by no means the end of your business financing journey.
Allow yourself to overcome your frustration; then follow these steps to dig right back in, solve what problems you can and find the funding your business needs.