There’s no way to sugarcoat it: getting turned down for a loan stinks. Chances are the reasons you needed funding still exist, and now you’ll either need to scale back your plans or find another source of cash. If you can backburner your plans for now and reapply for a loan later, let’s tackle what to do to increase your chances of being approved the next time.
Find Out Why You Didn’t Get Approved
You can’t fix the problem without knowing what it is, so this should be your first step. There are several reasons lenders may decide not to approve loans, and each requires a different solution. A bank won’t always offer an explanation, so follow up to make sure you know why you weren’t approved.
Having poor credit is one of the most common reasons for getting turned down. Other common reasons are: you’re not making enough money or you don't have the proper cash flow to pay back what you’ve asked for, you don't having enough collateral to back up the loan, or you have too much debt already.
Tailor the Plan to Suit the Situation
Your strategy for getting approved for a loan the next time you apply will depend on why you weren’t approved this time. Let’s look at some different scenarios.
Not enough capital
This is probably one of the biggest Catch-22s of all. You need the money in order to make more money, but you’re not making enough money to qualify.
What can you do? Find out how much you can qualify for. Perhaps it’s not as much as you asked for initially, but if you can borrow some of what you need, that’s a great start. Paying it back will also help you establish credit with the lender, allowing you to qualify for a bigger loan the next time around.
Alternately, ask if having a co-signer will help. Having more resources behind you may make you a more attractive candidate.
Inadequate cash flow
Simply put, a lender is doing the right thing by turning you down if you won’t be able to make the payments required to pay back the loan.
Getting a handle on the cash flow of your business is imperative, and there are practices and policies that will help. The Minority Business Development Agency also points out that some accounting practices may hurt you when you apply for a loan, so be sure to discuss this with your accountant or other financial professional.
Bad credit or no credit
Credit is another of the most important factors a lender will consider when making a loan decision, and the truth is, if your credit isn’t good or if your credit history is lacking depth, it will be very difficult to qualify.
There are options available for those with bad credit, but the best one is to keep yours in the best shape possible. And if it isn’t, get it there. For ideas on how to build a good credit history and how to improve your credit score, see our article on “How to Build My Credit.”
Lack of collateral
Collateral is the term for assets that you put up as security for a loan. It’s assurance for the lender that if you don’t pay, there will still be some way for them to recoup their money. Without sufficient collateral, a lender will be hard-pressed to approve you.
If you don’t have enough collateral in your business—such as inventory, equipment, or cash savings—a lender might accept personal assets as collateral, such as your home or car. Always keep in mind, however, that using your own property as collateral means you are willing to risk losing it if you default.
As with capital, it might be possible to get a co-signer with enough collateral for you to qualify.
Length of time in business
Because they’re taking a risk, lenders want to be as confident as possible that they’ll be paid back. Unfortunately, the risk is greater for younger businesses that haven’t been around long enough to prove themselves. Of course, you can’t magically invent a history for your company, but you can help make a lender more comfortable by demonstrating a solid plan for success going forward. Having a strong business plan will help you run a more successful operation, as well.
Choosing the wrong lender
Getting a loan is like having a silent partner in your business, one who is literally invested in its success. As with any partnership, it has to be a good fit. If you’ve been turned down, it may just be that the lender you approached isn’t right for you—or isn’t right for you at this time.
A credit union may be more suited to your community-based business. A microlender might be the perfect choice if you’re a startup. Just because one bank said no, doesn’t mean every lender will turn you down.
Where Else Can You Turn for Business Financing?
Fortunately, there are other options if you do strike out with the loan officers.
Friends and family
Many small businesses first get off the ground with the help of people closest to them. Who else knows you better or believes in you more?
Even though these types of loans are much more informal, experts still advise drawing up an agreement that spells out the terms. Entrepreneur Magazine offers some good guidelines and advice.
Expanding the circle of people you ask is another approach, and using social media has made it easier than ever to do so. With crowdfunding, you promote the fact that you’re looking for funding, and people contribute in exchange for some type of reward or share of the company. Find out more in our piece on “Crowdfunding a Business.”
You can take on one or more partners who are able to supply the cash you need, although you will likely have to give up a significant portion of ownership and control—provided you can find someone to invest.
Sometimes, the vendors and suppliers you’re doing business with can be sources of funding. After all, they’ve got a vested interest in your success. Arrangements can be anything from an extended line of credit to an actual loan. You don’t know if you don’t ask!
If you’re confident in your ability to repay, you can take a cash advance on a credit card or get a merchant cash advance. Credit card cash advances eat into your available credit, which can lower your credit score. Be aware that the interest rate will be high on this type of financing, and it can lead to a cycle of debt that is difficult to get out of, so proceed with extreme caution.
There are other financial service providers, such as online lenders and factoring companies that provide funds to small businesses. Always remember, though, that the further you get from mainstream lenders (like banks, credit unions and microlenders), the fewer regulations there are to protect you. Before considering these alternatives, familiarize yourself with the most common predatory lending practices and know what to watch out for.
Do it yourself
Finally, consider whether you really do need outside funds at all. At first, you may think you do, but with some creative thinking and further examination, maybe you can get by on your own. In business parlance, this is known as “bootstrapping,” and Inc. Magazine says it’s a choice some entrepreneurs are happy to make.
Getting turned down for a loan can be tough, but once you know why, you can work to change the outcome. With the same tenacity you need for every other aspect of your business, you can also find and secure other sources of funding or decide to power through on your own.
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