Small business loans can be a lifeline for SMEs in a cash crunch. However, securing one for your small business can often be challenging. By nature, lenders (especially banks) consider SMEs as high-risk businesses as they may have unstable cash flow, and some may lack sufficient credit and financial history to be eligible for funding.
Finding yourself face to face with a denial letter from a lender can be discouraging. However, it shouldn’t stop you from applying for the financing again. Outlined below are the next steps you can do after a loan denial. By doing some of the tips mentioned below, you’ll be able to increase your odds of approval should you decide to apply for another business loan in the future.
1. Find Out Why They Rejected Your Application
One of the first things to do when you’re denied a business loan is to find out why you were denied in the first place. As a rule, banks and alternative lenders must state the reason for loan rejection to the borrowers. If they don’t say the reason in the denial letter, consider reaching out to them to find out why you didn’t get loan approval or learn more from Kapitus.com.
Small business loans usually reject loan applications for several reasons. The most common ones are outlined below:
- They have less than a year of business history
- Poor cash flow management
- They belong in a high-risk industry
- Their credit utilization ratio is more than 30%
- Lack of valuable collateral
- They’re asking for too much funding.
Once you know why the lender rejected your application, you can work on improving your credentials, so that by the time you re-apply, you’ll have better chances of qualifying for the financing. Moreover, if you have an excellent credit score by the time you apply, you’ll improve your odds of qualifying for better loan terms.
2. Give Your Credit Score a Boost
One of the first things lenders will look at when applying for a loan is your credit rating or score. Your credit score is basically a summary of your credit and repayment behaviors. Essentially, the higher your rating is, the more creditworthy you are and the less risky you are as a borrower.
The financing company will often check both your personal and business credit standing to get a bigger picture of your borrowing behavior and finances.
If the reason behind the loan denial is poor credit standing or lack of credit history, you can take steps towards improving it. There are several ways you can do this, including:
- Working with suppliers that report payments to the credit bureau
- Repaying your debt on time
- Reducing your credit utilization ratio
- Applying for a business credit card
In addition to the practices above, it’s also wise to check your credit standing once in a while. Consumers are entitled to a free copy of their personal and business credit report once a year from one of the major credit bureaus. If you’re working on improving your credit, checking them more than once a year would be ideal.
Checking your credit report frequently allows you to spot mistakes that could lower your credit score. If that happens, be sure to contact the credit bureau immediately to correct the error. Once it’s fixed, recheck your credit report.
3. Make a stellar business plan and adjust as necessary
A business plan doesn’t just help guide you in running your business. It can also be quite handy if you’re planning to apply for loans from banks and other lenders.
When applying for a loan, your business plan should contain all the necessary information about your business. This includes:
- Executive summary
- Brief business description
- Business mission and vision
- Marketing strategies
- Service or product description
- Market and competitive analysis
- Realistic financial forecasts and projections
Additionally, your business plan should be well-written. It should explain everything about your company, including your goals and how you plan to achieve them. Remember, you may see your business as something that is brimming with potential, but lenders don’t. Your business plan will serve as your key to convincing them why it’s worth investing in. That said, write your business plan in a simple (yet professional) manner. If you do it right and the lenders will see just how viable your plans are, the better your chances are at getting your loan application approved.
4. Try Your Luck with FinTech (Online) Lenders
One of the reasons SMEs often get rejected for loans is that they can’t meet the high standards that banks require. Traditional lenders typically require a long list of documentation, which businesses might find tedious if they’re looking for quick access to capital.
On the other hand, online lenders are less stringent with their application process and may be more willing to work with high-risk businesses (aka startups or those with less stellar credit standing). They are also known for their streamlined application process, flexible eligibility criteria, fewer documentation requirements, and faster approval.
However, know that online business loans can come with high-interest rates. Before proceeding with your application, be sure that you can afford the repayments. Otherwise, you might end up hurting your credit score even more.
If time is on your side and you’re not in a hurry to obtain financing, consider delaying your application until your business becomes more qualified. In the meantime, you can work on improving your credit score or restructuring your business plan.
Once your credit score reaches a good point and you’re confident of your business plan, you can resume your loan applications. A high credit score and a well-written business plan could also afford you better loan terms from banks, resulting in bigger savings for your business in the long run.
The Bottom Line
A business loan denial happens all the time, especially among startups. However, rejection doesn’t take out all hope for you. Instead of losing hope, you can take it as a learning experience.
By following the tips above, you’ll be able to improve your chances of qualifying for small business financing in the future. If you still can’t be eligible for business loans from banks despite your efforts, try working with a financial expert for help. They can advise you on the different alternatives available for you.
For more information about alternative small business loans, you can talk to our financial experts here.
We hope the tips above will come in handy if you’re planning to re-apply for financing soon. Good luck!