Unless you are fortunate to have tons of cash in your bank account, you will need to pursue a business loan to get your startup off the ground. Many small business owners and entrepreneurs pursue business loans aggressively to get the financing they need to prove their ventures and buy the necessary equipment and supplies to start turning a profit.
But what if you apply to one lender – or several – and consistently get rejected for a business loan? On the bright side, you’re not alone; banks typically reject about 73%of business loan applications. Still, you need financing, and fast,
Today, let’s take a look at how you should handle business loan rejection, plus go over some steps to minimize the odds of rejection in the future.
Ask for Feedback
One of the best things you can do after being rejected for a business loan is to ask for feedback from the lender themselves. In many cases, lenders who reject your business loan application are more than happy to offer informative feedback if you ask politely and respectively.
For example, they can tell you that they rejected you because:
Your credit score or business credit score was too low (a score of at least 700 is generally considered needed to secure low-interest business loans),
Your application was missing some important information.
Their loan officers came to a conclusion based on their personal experience.
No matter the answer you receive, this can be very helpful when putting together a new loan application package. You can take the feedback and make sure that your next loan application doesn’t have the same weaknesses and might get approved for a business loan in the future.
Examine Your Loan Application to See Why It Was Rejected
Whether you ask for feedback or not, you should carefully examine your loan application to check for errors or other easy reasons why it might have been rejected. For example, if you look at your application and notice that you failed to attach a critical document, like a profit and loss statement, or didn’t include some information, you can reasonably conclude that those flaws are the reasons why it was rejected in the first place.
A quick examination of a rejected application can oftentimes let you course correct and reapply to the same lender within a short timeframe. Of course, many of the best lenders will politely tell you that you are missing some key information and ask for it before rejecting your application outright or tell you if you should use a business loan calculator and ask for a more reasonable sum.
Furthermore, be sure to look at the requested information or requirements from a given lender. If you missed something they require, be sure to include it with your next business loan application.
Analyze Financial Metrics and Ratios
Consider analyzing and improving various financial metrics and ratios. If you can improve these, you’ll make your business more attractive as an investment for lenders. You should analyze and improve metrics and ratios like:
Your debt to asset ratio. Compare your total debts to your total assets and make sure your assets are significantly higher than your debts if you want a good loan.
Your current debt-to-income ratio, which measures your ability to meet your financial obligations. You need a current debt-to-income ratio with a higher income than your debts to get approved for most business loans.
The quick ratio, which measures how you can meet your current debt obligations with your liquid assets. It represents your total current assets, excluding your inventory while dividing by total current liabilities.
Essentially, try to minimize your current debts by paying off existing loans and maximizing your revenue before applying for a new business loan.
Improve Your Credit
Your business credit score is the number one determining factor as to whether you’ll get a business loan (alongside other factors like your business plan and finances, of course). If your business credit score is too low, or if your personal credit scoreis too low it creates a negative impact on everyday expenses such as your car insurance rates or new auto loans, you might get your business loan rejected.
To that end, it might be a good idea to work on improving your credit scoreafter a business loan rejection. You can do this by:
Applying for smaller loans you can be approved for, then paying them back over time
Using credit building credit cards, especially if you need to improve your personal credit score
Paying all of your debts and utility bills on time
Examining your credit report for potential flawed line items or missed payments that you actually paid on time
Improve Business Cash Drivers
To make your business more attractive to lenders, consider improving your company’s cash drivers. The cash drivers, in a nutshell, are all of your cash influx channels. In other words, the more ways you have to make money, the better your business loan application will look to a prospective investor.
You can do this by offering more products, coming up with additional revenue streams, or otherwise improving your business model. As a side bonus, this will show prospective lenders that you are committed to making your business as “fundable” as possible.
Apply to Other Lenders
Naturally, you can always apply to other lenders if one lender is being very stubborn and doesn’t seem willing to part with any investment cash. There are plenty of fish in the sea, and this applies to lenders.
Take a look at other potential business financiers in your local area or in your industry. Send out a few business loan applications. If you keep getting rejected, though, you may need to continue working on your business plan or fundamentals.
Consider Other Financing Options
Additionally, it’s important to remember that you can pursue alternative financing options if business loans aren’t working out for you at this time. Maybe your business idea is a little too “out there.” Or maybe you don’t have the numbers to convince traditional investors that your organization is worth taking a financial risk on.
That’s where alternative financing options like Mainvest come into play. Mainvest, for example, is perfect for small businesses just like yours since it allows you to receive investment funds from pools of smaller investors. You can start an investment campaign on Mainvest to simultaneously build your brand and engage with your supporters.
More importantly, you can connect with a broad community of entrepreneurs and other small businesses. By connecting with brands in the Mainvest ecosystem, you can build partnerships and expand your investment at work over time.
Bottom line: if you keep getting rejected for business loans, think about pursuing different means of acquiring the cash you need to start or expand your business.
Ultimately, cutting rejection from a business loan is tough, but it happens to anyone. Don’t give up; instead, brush yourself off, take a look at your finances and business model, and apply to another lender in the future. Don’t forget to consider different forms of financing, as well – so long as you keep trying, you’ll get the funds you need to start your business sooner or later.