Best Ways to Get Business Financing After Multiple Rejections

A denied loan application for a small business may seem like the end of the road, especially when you had high hopes for the future of your company. But being denied a loan doesn’t necessarily mean it’s all over - it may just mean that you need to look elsewhere for working capital.

Reasons Your Application Was Denied

Before considering other possibilities, look into the reasons your application was denied. There may be issues to resolve, and fixing these could make the difference next time you apply. Knowing the reason for the denial also matters because sometimes it’s the lender’s mistake. If not, though, it tells you what needs fixing before asking them to have another look at your application.

Each lender has a slightly different way of looking at borrowers, and of putting a weight on each element of the application. Some lenders are generous, while others are pickier. If you were turned down and did not receive an explanation, contact the lender and ask for one. Common reasons include:

• Issues with business credit (and/or your personal credit if that was checked)
• Inadequate business length in operation. New companies may face more difficulty gaining a loan.
• Unfavorable business industry
• Not all of the application requirements were supplied
• Cash-flow situation is not in good shape

You can pull your personal credit report for free each year from the three main bureaus - Experian, Equifax and TransUnion. The report shows your borrowing and repayment history, your debt-to-credit ratio and any recent inquiries into your credit. Your personal score is based on the contents of the report. Even when you’re trying to borrow for your company, lenders may examine your personal credit. It is a bit surprising, then, that many small-business owners are more careful about their own credit than their business credit. After all, no one ever explained it to them. They didn’t know it exists, or that lenders look at it.

There are three big credit bureaus for business lending - Experian Business, Equifax Business and Dun & Bradstreet. Many lenders check these before anything else. It is wise to know what they show about you before submitting a loan application. Even if a loan application is ultimately denied, checking a company’s credit - before and after applying - can be an invaluable tool. Having a weak business credit score can prevent your company from getting a loan. But when you have credit in the business name, you can work on turning it around. Paying on time with business-name credit (not a personal credit card) can help raise that score. Using business credit cards wisely matters, as well.

Five Cs

Credit scores are important, yes, but they are not the only factor. Lenders look at the whole company and its ability to repay a loan. In order to do this, lenders assess the “five Cs” of credit and lending. Knowing these factors is helpful in assessing your own company’s viability.

Capacity: Lenders look at other debts, cash flow, and repayment history. What they’re trying to gauge is if your company can add another payment. Most want a debt service ratio of at least 1.2, or 120 cents for every dollar you owe. If you fall short of that, then make sure you have sufficient steady cash flow to cover whatever a loan adds.

Collateral: Collateral refers to something a lender can sell if the borrower defaults, for example, due to bankruptcy or closure. SBA-backed loans do not always require collateral. A private lender may ask for collateral, with a lien to follow. Of course, the collateral must be of greater value than the loan itself.

Capital: Lenders will check on the owner’s personal investment, cash on hand and receivables on the company books. The more investment on hand, the lower the risk the lender must take. Little available capital could make a borrower look like a high risk.

Character: a lender will look at the business and personal history, reputations and references provided. A company owner who pays bills late will not inspire confidence in a lender. If there is a past bankruptcy, failed business or personal loan default in the background, that may threaten an approval. A good business credit history could show you can pay, but if the lender finds you have a habit of paying late or of being irresponsible with cash, you will have a more difficult time getting a loan.

Conditions: Imperfect credit does not automatically rule out a loan. But it can affect conditions. A lender may set a higher rate of interest, demand more collateral, or ask for a personal guarantee. A higher rate of interest or more collateral may serve the same purpose as stronger credit for a lender. If your credit is not stellar, discuss conditions with the lender before applying. That way, you don’t go into an application blind.

Worth Trying More than One Lender

If a lender says no, it does not mean no one will say yes. Lenders differ in how much risk they can comfortably absorb. A denial may say more about the lender’s guidelines than about your business.

It is fine to try again and see if you can secure a small business loan, but first, find out what went wrong the first time. Each application could bring an inquiry on your credit. Being denied multiple times may leave your business with too many inquiries on record. Enough inquiries can lower your credit score, and that makes things even harder in the future. Stop and get the picture on your credit before making a first, or second, or third application.

Some of the reasons a bank denies you are harder to change. The time your company has been in business can’t be altered. And a new industry can’t get less new. That said, being late on payments is one reason you can address. If the problem is time in business or industry, consider venture capital, crowdfunding or angel investors instead.

Or you could personally borrow for your business. A personal loan lets you keep the loan in your own name, but if the business doesn’t do well or you struggle to repay the loan, it is your own personal finances that are at stake. You owe the loan regardless of what the company does in the future.

A neighborhood bank can also be worth a look. Visit a community or mutual bank, local to the region. Smaller, local banks know where their bread is buttered - they often see loaning out in their community as a reinvestment. With an understanding of local markets, they may be more flexible than the big banks. They may walk a fledgling borrower through the process and may even connect them with local resources. Banks with a community focus may be an especially attractive source for startups and first-time applicants.

Before jumping into a repeat application, consider what you can change to address issues on the first application. And consider finding a long-term lender-partner, not just securing a loan. It may take time to find a permanent partner, but working on it can make any company better prepared for the future.