Starting a business from the ground up takes a lot of work. You do your research, create a foolproof business plan, apply for business term loans, put everything together, and hope for the best. But despite your efforts, you still hit a major setback – your small business loan application got rejected.
Business loan rejections can be devastating, especially if you’re tight in cash. If it offers any solace, only one out of four business owners qualify for a loan. There are numerous reasons why your application got rejected. If you can figure out why you were denied a loan, you can work on improving your application and apply the second time around. Additionally, you can apply for alternative business loans suitable for your business.
To help you get started, here are five things you need to do after being denied a business term loan:
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Know Why Your Loan Application Got Rejected
Lending money to entrepreneurs is a risky business. To lower the lender’s risks on the loans they make, they set loan requirements and match them against applications. There’s a reason why you didn’t qualify and there’s no better to ask than your lender. If your loan application got rejected, lenders will notify you in writing as to why you didn’t qualify. For instance, the letter might mention that you don’t have enough collateral or you have a poor credit rating. Knowing the reason for your rejection is crucial if you want to qualify for a loan the next time you apply.
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Work on Your Credit Score
Believe it or not, more than half of small business owners in the country don’t know their credit scores. This can be troubling considering how important credit rating is when applying for a business loan. Aside from your personal credit score, potential lenders will assess your business credit history as well. In this way, they’ll get a clear picture of how you handle your finances.
Similar to a personal credit score, a business credit score is based on your company’s credit obligations, payment history, legal filings, number of years in business, size, and type of business, and repayment performance compared to similar companies. You can improve your credit rating by applying for business credit cards, working with supplies who report payments, and separating personal and business finances.
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Improve Your Company’s Financial Standing
Along with your business and personal credit scores, your company’s financials is also a major factor when it comes to loan qualifications. Pay attention to the strength of your yearly revenue, cash flow, and profitability. To better improve your financial standing, assess your financial standing from a lender’s perspective. You can choose a loan that will best fit your company’s financials.
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Consider Alternative Financing Options
If you’ve been denied a loan from one lender, it doesn’t mean it’s a hard “no” for the others. Loan qualifications and requirements vary from lender to lender. The type of loan you’re applying for and the terms of your financing can affect your application as well. Even if you don’t make drastic changes to your credit or cash flow, you can still qualify for a small business loan if you check your options thoroughly.
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Think Long-Term
You can fix your credit rating or issues in business finances overnight. To qualify for more favorable loan terms, it’s important to make long-term financial changes. Aside from improving your credit rating, you should also do the following:
- Make Payments on Time: If you’re behind on loan payments, make sure to remedy it ASAP so your credit can recover. You don’t have to repay all the debt you owe, but you can contact your lenders and discuss a payment plan that favors both parties.
- Increase Your Income: Who doesn’t want to increase their monthly earning? Increasing your income is easier said than done, but if you’re planning to borrow money, it’s important to pay attention to your profitability. If you plan on making major changes to your business, it’s better to pursue them after you’ve qualified for a loan.
- Slowly Pay Existing Debt: If you have existing loans, this could affect your ability to qualify for small business loans. Lenders will look at your debt and your income. By minimizing your debt, you also reduce your debt-to-income ratio. As a result, this makes you look like you’re financially capable to handle another loan.
Learn More About Business Term Loans Before You Reapply
Qualifying for business term loans from traditional lenders is not as grim as it sounds. The key is to find a loan product that’s suitable for your needs and to work with a reputable and experienced lender. In the meantime, there are alternative financing options that have a more lenient application process.
