If your application for a small business loan was denied, do not despair, as it is more common than you think. According to the Private Capital Access Index (PCA Index) by Dun & Bradstreet and Pepperdine University, 47 percent of small businesses found it difficult to acquire debt financing. So receiving a denial may just be a signal to the small business owner that changes need to be made to acquire financing in the future. Below are common steps that can be taken to ensure success when you choose to reapply.
The first step is to contact the lending source to find out why you were denied. Lenders are required by law to provide a reason in writing as to why you were denied a loan. The most common reasons for denial include having a low credit score, issues with the applicant’s character (such a criminal background), lack of collateral/assets (including working capital?,accounts receivable, inventory or equipment/real estate) to secure the loan,insufficient revenue or capital to repay the loan, or having limited capacity to pay back the loan. Once you identify the denial reason, you can begin to adjust in that area and reapply when you are ready.
When applying for a loan with a bank, many require a credit score of 700 or above, while most alternative lenders will require a score of 600 and above (but some higher risk sources will accept a lower score). Simple ways to improve your credit score are to pay down existing debts, limit credit utilization (the golden rule is using under 30 percent of your available credit),establishing a history of making on-time payments and asking vendors to report their positive payment experiences with you to your credit bureau.
To improve collateral, evaluate your existing assets and determine if there are investments you could make that would benefit your business and serve as good collateral when applying for a loan. For example,purchasing a piece of equipment that would automate part of your business processes. In regard to increasing capital, focus on figuring out ways you can increase revenue and profits while paying down existing debts and taking action to do so. Concentrating on any or all of these key areas can improve your chances of being approved for a loan the next time around.
To improve capacity, an applicant will want to work on their Debt Service Coverage Ratio (DSCR). This is a measurement of cash available compared to debt and is used by banks to determine whether you have the ability to repay your loans. Calculating your DSCR can be done through dividing your business’ cash flow by your estimated loan payment. For example, if your cash flow is around $3,000 per month and you calculate the monthly payment on the business loan as $800, your DSCR is 3.75. Generally, lenders will want to see a DSCR of over 1, as if it is lower than 1, that indicates to the lenders that you might not have the funds needed to pay back the loan. In order to increase your DSCR, the best ways to do so are either to increase income or pay down debts.
The next step is determining when and where to re-apply. Each loan application you submit will result in the lending institution doing either a hard or soft credit inquiry that will show up on your credit report (note that hard inquiries will slightly lower your credit score, while soft inquiries do not affect your score at all). Due to this fact, it is recommended to wait six months before reapplying to give yourself the best chance of qualifying. While you are waiting to reapply, you should work on resolving the reason for your loan denial.
Once you are ready to reapply, it is highly recommended to try a different bank than the one you originally applied with, unless your situation has significantly improved or it has been over a year since the last application, as the original bank could hold the previous denial against you.If you originally applied through a larger bank, try applying with a small banknext time, as smaller banks historically have higher acceptance rates than larger chain banks.
If you have struggled to get a loan by going through a bank,other options include seeking financing with online or alternative lenders.According to the PCA Index, 71 percent of respondents had success securing financing with an online or alternative lender. Many online lenders are more lenient when evaluating credit scores and are more open to newer businesses.These sources offer loans and lines of credit from $5,000 to over $2 million and funds are typically disbursed within 24 to 48 hours. It should be noted that these notes can have shorter repayment terms but might include higher rates. There are Outside of that, you could also consider applying through nonprofit lenders that specialize in helping small businesses secure financing.
