So your loan application has been denied.
First step: Breathe. Application denials happen all the time — it doesn’t necessarily mean the end of your relationship with this particular lender.
Lenders often reject applications if they need more information or require you to change a few key portions. Aside from omissions, other common rejection causes include poor credit scores (both personal and business), cash flow concerns, inadequate collateral and applying for types of loans (e.g. a line of credit) that aren’t a good fit for your needs.
There might be parts of your business that need your attention, but have gone under the radar in the flurry of day-to-day operations. We’ve put together this list of recommendations below (and some useful tools) in order to help you turn that “No” into a “Yes.”
Get all of the information
We hope it goes without saying, but be sure to keep careful records of all of your documentation relating to your loan application(s). In the event of a dispute, you’ll definitely want to have those documents on hand.
Some lenders might provide you with the reason for your rejection straight away, but others might come back with a simple “No.” If that’s the case, don’t fret. The Equal Credit Opportunity Act (ECOA) requires lenders to tell you why your application was rejected.
Pro tip: If you’re not immediately informed as to why your application was rejected, you can request more information within 60 days of the rejection notice.
Re-submitting your application
Lenders’ re-submission practices and preferences vary. Be sure to check with your particular lender to ensure you’re following their protocol.
We hope you triple checked your application for errors and omissions, but keep an eye on this helpful checklist from the U.S. Small Business Administration (SBA). It will help you as you move forward with your re-submission, as well as any future applications.
The ECOA also protects you against credit discrimination — if you feel you’ve been discriminated against in any way, don’t keep it to yourself.
The Federal Trade Commission (FTC) has a more rigorous overview of ECOA protections on their website (and lots of other useful tools), but here are a few key factors that lenders cannot take into account when evaluating your application:
- National origin
- Sex (Gender)
- Marital status
- Receipt of income from any public assistance program
Visit the FTC’s site here for more information on how to protect yourself against credit discrimination.
Adjust your expectations
It’s true that some rejections can be reversed quickly if you’ve merely left out some important required information. With that said, addressing deeper concerns that arise in a rejected loan application can take months or years.
If it’s an issue with your cash flow, for example, you might need to work to reduce expenses or increase your revenue in order to make your application more attractive. Remember — a rejection is a chance to reevaluate your business. If there’s an unprofitable area that you’ve kept afloat, now might be the time to shut down that avenue and focus your resources on what’s really working.
Consider alternative lenders
It’s harder than ever to get a small business loan from the bank. Luckily, alternative lending has grown enormously over the last 10 years. With solutions like peer-to-peer lending, more and more small business owners are seeking different methods for acquiring funds.
Pro tip: Be open minded. You might find that lenders you haven’t considered are more attuned to your business’s mission or goals than local or big-name banks.
Check your credit score
If your lender cites “credit score” as a key reason for denying your application, be sure to ask what score appeared during their check.
Although it’s rare, lenders might have received a faulty report after running your credit. So if you notice any discrepancies between the score you expect and what they have on file, let them know immediately.
Your business’s credit is important, obviously, but a loan denial is a good time to reevaluate your personal credit as well. Your personal credit score helps lenders evaluate your likelihood to honor your contract and make your payments.
Think like a lender
While you might have dozens of reasons why you think your business will flourish in the coming months and years, lenders tend to be more pragmatic.
For example, you might be betting on a huge influx in customers when a new housing development or public transportation station opens. But if your cash flow shows that you’ll have trouble making your payments in the short-term, lenders will likely turn you down.
Pro tip: A quick and easy trick to evaluate your ability to handle loan payments is to check your Debt Service Coverage Ratio (DSCR).
Lenders want to know that you can service your debt, so your DSCR is a big factor in evaluating your application. Here’s how to calculate the DSCR for your business:
Cash Flow / Loan Payment = DSCR
A DSCR below one signals that you don’t have enough (or won’t have enough) cash on hand in order to make your monthly payment(s). That’s a huge red flag for lenders, so if you find yourself in that territory, make sure that you’re working to boost your cash flow and therefore your ability to manage your debt.
The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.