You’ve gone to the bank and met with the loan officer. You’ve collected tax documents, financial statements, legal documents that you almost lost, made adjustments to your business plan and submitted it all in a beautiful package.
Then, you get an envelope from the lender. You open it eagerly, and — denied.
Despite the major disappointment of now having to wait for the desired financial help for your business, you’re now feeling embarrassed and discouraged. What went wrong? Why were you denied for a business loan? What do you do now?
The first place to go is the denial letter itself. Depending on how the lender does things, you might be given the reason for denial in the letter. If not, you’ll have to reach out to the lender and potentially have to file a request for more information.
Some common reasons for denial are not having enough collateral, weak business performance (determined by your financials), and a less than stellar credit profile, which can either refer to unsubstantial credit history, or a low personal or business credit score. Once you’ve determined why you were denied, you’ll have a clearer idea of what needs to be improved.
As you move forward, try to look at your business like a lender would. Though business loans are granted based on a variety of factors, at the end of the day, it all comes down to one thing: perceived credibility. Do you have a financially sound background? Are you and your business a worthwhile risk?
If your business is underperforming, it could be a red flag and reason for a lender to deny your loan application. If they don’t believe your business has the ability to pay back the loan, they won’t lend you money.
It’s always good practice to review your financial information and adjust your business plan accordingly, but this is especially true when you’ve been denied for a loan. Where can you cut costs? Where are there opportunities to save? Did you buy too much inventory this year?
You’ll likely find areas where you can make adjustments and improve your profile for the next time you apply.
Whether or not you were denied based on your credit profile, it’s worth your time to review your credit reports and scores.
Depending on the type of loan you applied for and the lender’s standards, they likely checked both the business owner’s personal credit score and the entity’s business credit score.
You are legally entitled to one free copy of your personal credit report for the year. However, no such law or allowance currently exists for business credit reports, though there are certainly places you can view your business credit score for free.
The issue may be lack of credit history, particularly for younger businesses. However, if you were denied for a loan, chances are that your high debt utilization ratio or below standard credit score are getting in the way. If this is the case, there are certainly steps you can take to make your business credit profile shine. Here are a few suggestions:
Opening a business credit card is one of the most effective ways to begin to build business credit. But of course, there are a few caveats. When used wisely, a business credit card can help you build business credit and solid credit scores fairly quickly. The key thing to keep in mind is that you are trying to build credit. So if you do open a business credit card, don’t jeopardize your business, or the score you're nurturing, by overextending yourself or missing payments.
Carrying a high balance can be like a wrecking ball to your business credit.
A high debt utilization ratio can prevent you from getting the business funding you need, so it’s worth your time and budgeting to pay down those high balances.
This doesn’t necessarily mean to pay down the highest interest accounts first, although doing so will certainly save you money. More importantly, you should focus on the accounts which carry the highest percentage balance compared to their credit limit.
The benefits of good business relationships are many, but when it comes to business credit, being in good standing with suppliers and vendors can unlock flexible payment terms and lines of credit, both of which can open up access to products and services without having to pay upfront.
Additionally, if you build relationships with vendors and suppliers that report to the major credit reporting agencies – and you should – you will begin to establish that sought after credit history. And if you’re paying on time, or early, the attached credit score will become stronger and stronger.
Monitoring your credit – both your business and personal consumer credit – particularly in today’s economy, is an important step in avoiding bad credit.
Mistakes do happen, and if they show up on your credit report, you can be forced to deal with the destructive aftermath.
Monitoring will give you the chance to refute false claims immediately. Furthermore, keeping tabs on your credit, is an important activity in general and should always remain a priority.
A business loan can make the difference between where your business is at currently and that next step. Be sure to take the necessary steps to improve your standing before you apply, and improve your chances of qualifying in the future.