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How to Handle the 'Business Loan' rejection!

May 17, 2019

How to Handle the 'Business Loan' rejection!
How to Handle the 'Business Loan' rejection! | Photography: Intelligenthq

When you are denied a business loan, you believe things have come to an end. You diligently completed the paperwork, researched your options well, but the rejection of your application changed the entire situation. You consider will start to feel that all your math went wrong, and now you don’t know how to pursue with your business plan. If this situation sounds like yours then you are not alone, many entrepreneurs feel discouraged after the banks reject their business loan application and then they tend to believe their business dreams are all halted. 

But here is some good news for you; in many cases, entrepreneurs even after their first application is denied, become successful in obtaining financing in the later applications.

What is essential here is to find out why your loan request was rejected and take appropriate steps to change the condition – be it your financial and credit standing or the type of loan product, etc.

Don’t simply let a single denial let you hold back your dreams. But, before trying again read the steps below to ensure you get a positive reply on your next loan application.

1. Know the cause from the lender

Request the financial institution to give you a letter of explanation on why they rejected your business loan application. This is a vital step that helps you improve and address those specific concerns and then successfully re-apply in the future, as then you can understand the reason why your funding request was denied and rectify it. 

2. Check your credit scores

Good credit scores both business and personal credit will help you acquire a business loan easily. Personal credit score also has an impact on accessing a business loan, especially when your business is new and small. So, it becomes essential to check your credit report and score to be able to rectify any discrepancies or forgotten financial woes that may have been the reason for the loan denial. And if you find any errors, get them corrected immediately to ensure a smooth approval of your next business loan application.

Moreover, for the businesses, company's credit score also matters as some companies being relatively new would need to build up their business credit status by requesting vendors, creditors or even the landlord of your retail property or office space to report your payment history to primary business credit reporting services.

3. Improve the business financial standing

Besides the credit score, the other element that is considered by the lender is the internal financials of your business like your annual revenue, cash flow and business savings, etc. Hence, is it essential to review these from your lender’s point of view and take appropriate steps in improving your financial standing and eligibility for a business loan? Generally, your chances of loan approval increase when you seek a lower amount of funding until you have to build up your business’s financial standing. 

Lenders consider a debt service coverage ratio (DSCR) to check your eligibility and determine if your company has enough cash flow or not to be able to make a consistent and timely loan payments. DSCR formula is net operating income divided by total annual debt.

DSCR less than 1 results typically in loan rejection and 1.25 or higher is needed for getting loan approval.

4. Look for other loan options

Every lender’s loan requirement is different with different terms and product offerings. Explore different financing options that are easier to qualify when denied of a loan from one lender, look for alternative products with other banks. In many cases, you may not require to make significant changes on your financial or credit scores to secure a loan through other channels.

5. Apply correctly the next time

You rectified your credit status and have now chosen the right business-loan product, but sometimes simple mistakes or oversights on the business loan application can also become the reason for loan rejection.

Therefore check if you have all of the right documents and whether your identifying information and other elements of the application form are accurately updated. Also, check whether your balance sheet and profit and loss statements matched the business bank statements and tax documents that you had given with application.

Work on the loan application process more carefully, so you don't face a second round of frustration but never let a loan rejection end your business dreams.