Getting denied for a debt consolidation loan can feel like a roadblock, but it’s rarely a dead end. A lot of small businesses that get rejected find other paths to reducing their debt and improving their finances. Here are the steps to take after debt consolidation is declined.
Why the Loan Was Denied
Finding out why the loan was denied is an essential first step. The reason might show a lender mistake, which you could point out in a reconsideration request. For example, a lender may have misread your numbers, thinking your debt was greater or cash flow tighter than it actually is. In that case, you can correct the record. At the very least, the reason points to which factors to improve before asking for reconsideration.
Each lender has their own criteria, and they can range from very strict to quite lenient. Some lenders send an automatic notice explaining the denial, while others require you to ask directly. Common reasons for rejection include:
- A low personal or business credit score.
- A very young business without a proven track record.
- An applicant from a new or emerging industry seen as high-risk to banks.
- The applicant was not well prepared to present the company’s case.
- A history of irregular cash flow.
Getting a copy of your personal credit report helps you see which factors are holding your score down. You get one free report a year from each of Equifax, Experian and TransUnion. These reports include your borrowing history, payment history, debt-to-credit ratio, and recent inquiries. All of these shape your credit score. Remember that your personal credit history often affects business loans, but lenders also look at the business’s own credit history. You may have no idea what your own company credit report looks like.
The big three credit bureaus for business are Dun & Bradstreet, Equifax Business and Experian Business. A lender will often pull a business credit report before considering you for a loan, so it pays to review that report before you apply. It might explain the denial. If the credit report looks bad to you, it probably looked bad to the lender. Make sure your business’s loans and credit card bills get paid on time, every time. Your business’s credit history counts, but only credit set up in the business’s name counts. Even if you pay off personal cards and loans each month, they don’t build your company’s business credit.
The Five Cs
Lenders look at the whole story your finances tell. It’s not all about personal and business credit scores, although those are important. Understanding how lenders see things helps you present your own story. Lenders often sum up what they weigh as the five Cs: capacity, collateral, capital, character and conditions. Each of these can weigh heavily in your application, and each is something you can work on.
Capacity: Lenders weigh a lot when they decide whether you can take on more debt. The key criteria include: how much existing debt you have, your company’s cash flow, and your repayment history. Typically lenders expect at least a 1.20 ratio, meaning you generate $120 in cash flow for every $100 of debt. If your ratio is lower, it could be time to look at steps to steady your company’s cash flow.
Collateral: Lenders want a way to recover their money if you default, say through closure or bankruptcy. Government-backed SBA loans don’t always need collateral, but private lenders may. A lender may put a lien on property you own, so it has a claim if the loan goes unpaid. Lenders generally want any asset the loan is based on to be worth more than the loan is for.
Capital: Lenders look at several kinds of capital. Have you invested a lot of your own money into the business? How much cash do you have on hand, and are receivables pouring in steadily? Little business capital or personal savings can make a loan look risky.
Character: This covers things like your business and personal history, reputation and references. Lenders look at whether you’ve always paid what you owed on past loans or credit. Late bills and a bad name in your industry can haunt you. An earlier business bankruptcy or an unrelated personal loan default may lead to denial even with a good credit score.
Conditions: Lenders focus on managing risk. Even with imperfect credit, some borrowers may qualify for a loan. It may just come with a higher rate, more collateral or a personal guarantee. Independent counsel and a qualified financial professional can review the risks of these terms. Any offer remains subject to the lender’s approval. Collateral and personal guarantees may affect approval, but they also expose pledged assets or the guarantor to collection if the loan is unpaid.
Trying a Different Lender After a Denial
Banks and lenders all have their own risk tolerance. Some requirements also depend on their own financial situation. If one lender turns you down, that doesn’t mean every lender will. A similar application could get a very different result with another lender. Trying a different lender after a denial can make sense.
Before you jump from one lender to another, start with the one who just said no. First, ask them why. Knowing the rejection reasons gives you a better chance of succeeding with the next lender. Don’t pile up denials at several lenders. Each loan application likely means another hard pull on your credit, and too many hard inquiries can lower your credit score. A lower score then makes the next approval even harder, so apply where you have a real chance after fixing what you can.
Some reasons for denial are easier to fix than others. For example, the bank may have wanted you to be in business longer before they take the risk. If yours can’t be fixed easily, a qualified financial professional can help compare other funding options. These could include venture capital, crowdfunding and angel investors.
When you can’t get a loan for the business, a personal loan is another way to fund your venture. There’s a major drawback, though. It puts your personal finances at risk. With a personal loan, if the company can’t pay, the debt is still yours. So weigh both sides before signing the papers.
Local community banks can be more willing to lend to small businesses than giant national banks. Many see it as reinvesting in their own area. They may even walk you through the loan application to help you get the money you need. If you’re a startup, a community bank may prove more open than a big bank. That local connection is also helpful if you are new to business banking, for example because it’s your first business. Contacting one of the many community banks around you may be worthwhile before giving up.
Don’t let one refusal derail your dream. Instead, take a look at which factors you can change to improve your chances of success. Apply what you learned from the first time. Take steps to shore up business credit, steady cash flow and keep spending manageable. Remember that the goal of all these steps isn’t just to get a loan. It’s to forge a long-term partnership with a lender who understands your company and values your relationship.
About Delancey Street
Delancey Street is a business debt settlement company that helps business owners nationwide. Our goal is simple: negotiate proposed debt settlement terms with funders, subject to their agreement. Based out of New York, we work with business owners on settlement options. We tell you how it is; because your business and future is on the line.
