Securing funding through a business loan is crucial for a range of strategic initiatives. These include financing expansion projects, upgrading equipment, purchasing inventory, hiring additional employees, and addressing cash flow gaps. However, many business owners invest significant time gathering the necessary documentation and completing their loan application, only to have their loan request rejected.
Experiencing a business loan denial can be disappointing, but it is important to approach the situation with a positive attitude and a proactive mindset. Being told 'no' by your bank or lender isn't forever. It just means you need to figure out why your loan was denied so you can prevent this from happening the next time you apply. This Huddle Business Capital blog article explains what to do after a business loan denial.
Find out why your business loan was denied.
Common reasons for business loan denials include a low credit score, a high debt-to-income (DTI) ratio, and insufficient cash flow. Additionally, the lender's minimum borrowing requirements can also impact the approval process, and these requirements may vary from one lender to another.
If your loan request was denied, your lender may provide an explanation for the reasons. If not, it is advisable to contact them for clarification. Once you identify the reasons for the rejection, you can explore ways to improve your chances of success in securing a business loan in the future.
How to fix common issues related to business loan denials.
As mentioned in the previous section, it's important to understand the common issues that may have contributed to your business loan denial and how to address them effectively. Here are several strategies to help you fix or improve them.
Low credit score
If your credit score is low, take steps to improve it, such as making timely bill payments and reducing or paying off outstanding business debts. You might also consider requesting a credit report from one of the major credit reporting agencies to review for accuracy. If you spot any errors or discrepancies, ask the credit reporting agency to remove them.
High debt-to-income (DTI) ratio
Lenders look closely at your debt-to-income (DTI) ratio to evaluate your ability to manage additional debt. Aim for a DTI ratio at 35% or less. If your ratio is too high, consider reducing current liabilities before applying for a business loan. Some viable strategies include paying off high-interest debt, consolidating multiple debts into a single lower-cost loan, and avoiding new debt.
Insufficient cash flow
If you can prove to your lender that you'll have the necessary amount of cash flow to make your business loan payments, your chances of being approved for a loan will increase. Some ways to boost your cash flow include reducing expenses, negotiating more favorable terms with suppliers, and optimizing your billing and collections processes.
Choose a non-bank lending resource.
It’s well known that traditional banks impose strict qualification criteria for their business loan products. These requirements often include a thorough evaluation of the applicant's credit history, a demonstrated track record of profitability, and extensive documentation (e.g., a business plan and financial statements).
Non-bank lending resources, also known as alternative lenders, offer business owners a more accessible and streamlined approach to obtaining a business loan. The application process is typically faster and requires less paperwork; eligibility requirements are less stringent, and collateral is typically not required for certain loan amounts. Finally, many non-bank lending resources are known for their ability to expedite loan approval times and funding.
Plan for success.
When you're prepared to reapply for a business loan, especially if you're considering a different lender, the first step is to reach out to potential lenders. Ask about their minimum qualification criteria, as each lender may have varying requirements regarding credit scores, business revenue, time in business, and documentation. Understanding this will help you tailor your application to meet their expectations.
Once you have gathered the required documentation, review it for accuracy and ensure it is up to date. For example, a tax return or financial report from many years ago might look useful, but it won't help you obtain loan approval if your lender has requested the last two years of documentation. By being thorough in your preparation, you'll enhance your chances of securing the loan your business needs.
Disclaimer.
This Huddle Business Capital blog article is purely educational and contains general information and opinions; it is not intended to provide advice or recommendations of any kind.
