Many small businesses fuel grow and fund working capital with small business financing. Unfortunately, there are many small business owners who don’t get approved for a loan at their local bank—as many as 70 percent to 90 percent depending upon the survey you read.
If you’ve been turned down, the need for financing doesn’t simply go away.
Let’s talk about some of the reasons you may have been turned down and what you can do to improve the odds next time.
You need to know why your banker turned you down
Nobody likes confrontation, even your banker. So he or she might not want to get down into the details of why your loan application was rejected. And, if he or she is willing, it might be difficult to hear the reasons without being defensive. Nevertheless, you need to listen, and maybe even take notes, if you want to improve your odds of success with another lender. Additionally, don’t let your banker get away with vague answers—you need to know exactly why you got turned down this time, so you can address those reasons in your next loan application.
In fairness to your banker, only about half of all the great ideas that become small businesses today make it to their fifth birthday, so from the bank’s perspective, your small business is a pretty risky investment. As a result, your job is to convince the loan officer that your business is a lot less risky than the business owner he met with yesterday.
Most lenders really want to know three things. They might ask different questions, but here’s what they’re really looking for:
- Can you repay a loan? That’s why they ask about your annual revenues or cash flow. If they give you a loan, are you able to make the required payments? If your company has no revenue, it’s unlikely your loan application will find success. No revenues, or very small revenues, could be one reason your application was rejected.
- Will you repay a loan? This is where your personal credit score and business credit profile become part of the equation. They give the lender an idea of your track record. While very few borrowers have a perfect credit history, if you have a blemish or two, be prepared to explain any extenuating circumstances that may have contributed. If you can show 12-24 months improvement of a less-than-stellar credit profile, you’ll improve your chances.
In other words, if your credit profile shows you have had issues in the past making payments to vendors or other creditors, it could be one of the reasons why your application was denied. Additionally, this is why a very young business, who haven’t had an opportunity to build a credit profile could be denied. Lenders want to see a track record. Banks, for example, want to see a few years in business. Online lenders, on the other hand, will often work with a small business that has 12 months or more under his or her belt.
- What will happen should things not go as expected? This is why banks ask about collateral. They don’t want to be left holding the bag should you default on your loan. They want to make sure they can recoup at least some of the capital they lend should things go bad.
They are looking for real estate, equipment, or other valuable and fairly liquid asset they can sell in the event things don’t go as planned. Not all lenders look at collateral the same way though. In fact, some lenders don’t require collateral at all. But they will use other means, like a general business lien and a personal guarantee, to secure the loan. The requirements will vary depending upon the lender.
If you can successfully show a bank or other lender that you can and will repay a loan and can demonstrate that you can make each and every payment regardless of what happens, you’ll greatly improve the odds of getting approval from a lender.
Don’t Be Afraid to Look Beyond the Bank
The first place most people think of when they need a small business loan is their local bank. Unfortunately, depending upon you’re business need, the bank might not be the right place to look. Don’t be afraid to explore other options like an equipment loan, an online loan, or something else.
What’s more, the New York Federal Reserve has reported that most small business owners spend as many as 36 hours looking for a small business loan. In other words, for many borrowers, going from bank to bank might be a waste of valuable time and resources. If you can quickly learn why your loan application was turned down and look into all the other options available in addition to a traditional bank loan, you just may improve the odds of finding the capital you need—without wasting a lot of time.
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Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.