Getting a business loan through a bank can be difficult, and the process can be discouraging. A majority of business applications are denied by banks because the default rates for business loans are much greater than that of personal loans, credit cards, and mortgages. So, as a business owner, what do you do next after you are declined by a bank for a business loan? The good news is there are alternatives to traditional business loans and business lines of credit at a bank. Let's explore the next steps after being declined for a business loan at a bank.
4 Steps to Take when Being Denied or Rejected for a Small Business Loan
- Find Out Why you were rejected for a business loan
- What steps can I take to improve my business loan application
- Consider what other business loan alternatives are available for you now
- When denied, get educated, and don't give up!
Ok, once you are over that fact that you can't get that business loan from the bank now, the work begins.
Find out Why You Were Rejected or Denied for a Business Loan
Once you are rejected or declined for a business loan or business line of credit, find out all of the reasons why it was not approved. Often times the bank will give you one reason why and call it a day, but make sure you emphasize that you would like to know ALL of the reasons and to put it in writing from the bank. This will help you potentially solve those problems and get better results on future business loan applications.
Major Reasons Why Your Business Loan Application Was Denied
- Personal Credit- A lot of business owner doesn't realize that their personal credit plays a large role in credit decisions with banks. Banks want to see excellent credit scores, which usually exceed 720 or better. They also want to see at least three open and active trade lines on your credit that are over three years old, have high credit limits, and include installment loans like car loans and/or mortgages as well as revolving credit like credit cards.
- Business Credit- Business credit takes as long as five years sometimes to establish, and it is only based on the current business that you own. Often time's newer businesses (less than three years old) won't have any business credit at all. Business Credit comes from how you pay your business vendors and suppliers and who they report to, such as Experian Business Credit, Dunn Bradstreet, or Equifax Business Credit.
- Cash Flow or Bank Statement Health- Business Lenders evaluate the cash flow of the business by looking at the operating account business bank statements. Business lenders want to see what the daily business activities look like in terms of Debits and Credits and how you manage that against the money you maintain in the business bank account. What do business lenders specifically look at in those business bank statements? Well, they look to see the total volume of deposits(credits) per month, where those deposits are coming from, the number of deposits per month, the number of debits per month and where are those debits are coming from, daily bank balances, and average bank balance.
- Financial Statements- Banks and lenders look at Financial Statements in helping evaluate the creditworthiness of the business. You can expect an evaluation of past Business Tax Returns, Current and past Profit & Loss Statements as well as Balance Sheets. Additionally, depending on the type of business, an analysis of both Accounts Receivable Ledgers as well as Accounts Payable Ledgers may also be required. Many younger businesses less than five years old may not show enough profits for banks because newer businesses have a lot of initial capital investments of money that they are able to write off on business taxes.
- Time in Business- 1 out of every two registered businesses will fail in the first year. Many banks won't even entertain new businesses (less than three years) as they want to evaluate the business based on at least a three-year performance to evaluate the ability to repay. Past business ownership doesn't count a lot with banks. The longer the time in business, the more business funding products are available to a business owner and also will dictate better terms as well. As a business owner, sometimes there are just things that are out of your control to realize and educate yourself about what is available for your business at different points of the business's maturity. Sometimes financing isn't an option, and that's ok.
What Steps Can I Take to Improve my Business Loan Application?
- Improve Personal Credit- Get a copy of your personal credit at the time of your application and evaluate it. AdvancePoint Capital wrote a Business guide, "Common Questions About Getting Small Business Loan with Bad Credit," which explains in great detail what business lenders are looking at when it comes to business owner's personal credit. The article also talks about how personal credit works, how FICO scores are derived, and how to improve your personal credit scores.
- Improving Business Credit- Unlike personal credit, there is no standard business credit report, but there are simple steps you can take to build business credit fast. AdvancePoint Capital Business Wire wrote a business guide, "How Does Business Credit Work: A Simple Guide to Establishing and Maintaining Business Credit," which will take you step by step not only on how does business credit work but also how to improve and grow your business credit. Check it out it's is a great detailed read for sure.
- How to Improve Cash Flow and Business Bank Accounts Health- Business bank account health is so important to lenders and banks when evaluating your ability to handle a business loan payment. This is central to a business loan underwriter when they are trying to prove the business has the ability to repay the business loan.
5 Quick Tips to Have Healthy Cash Flow in the Eyes of a Business Underwriter
- Maintain at least one month of expense payments in reserves in your business bank account at all times. Having reserves for unexpected revenue drops is vital to business bank account health. Low average daily balance in a business bank statements can lead to a quick decline.
- Never have Overdrafts, Non-sufficient funds, or returned checks/items
- Get Overdraft Protection for your Business Bank Account
- Work with your Vendors and Suppliers and ask for some longer terms to repay them BEFORE your bank account cash reserves are depleted.
- Don't spend more than is coming in in sales and always maintain cash reserves for a rainy day!
How to Get Your Financial Statements House in Order
Investing in good account software like QuickBooks or other similar software bookkeeping and either designating yourself, employee, or bookkeeper to maintain accurate books is essential. Too many times, owners attempt to wear all hats in a business and then end up poorly managing the books. No your limitations as a business owner. At the end of the day, whether you, as the owner, handle this or a designee you, the business owner will be held to task for the financial statements. Manage your financials every month. Pick a day every month that financial reconciliation is done and stick to it so you can produce accurate statements on demands such as Balance Sheets, Profit & Loss Statements, and Accounts Receivable/Payable Reports. What that means is to record all relevant data and monitor your business bank account and receivables/payables DAILY. Do not take short cuts or be disorganized. Business Lenders love businesses that can provide documentation quickly and accurately in an acceptable account principal's format. Think about it; how can you make good decisions with your business if you don't have your facts straight. Get your financial house in order, and it will pay off for business health big time. Make sure all information related to your business is accurate. The following is a checklist of items to review for accuracy.
Business Listing Accuracy Checklist
- Secretary of State Filings- Make sure your business is filed correctly as a Corporation, LLC, LP, or other formation types. Check that all annual reports and filings and fees are paid up to date. Check for accurate information like does it show the proper owners attached as officers to the business. If not file, necessary amendment with your States Secretary of State. A lot of this can be done by going to your respective State in which you filed and search the States Secretary of State website.
- Business Listing on Google Business Profile- This is very Important. Many lenders today require accurate listings of your business, and they conduct Google searches of your business in underwriting when considering your business loan application for activity and relevance in your industry. Check your "Google My Business" business profile. If you have not already claimed it do so ASAP. If you search your business on Google by your company name and your Google Business Profile does not show you don't have a listing, and you need to claim one and complete all relevant information. If, or once, you are listed, check for the proper company name, address, hours, phone number, company description of services, and what you do, answer any pending questions and manage those REVIEWS!
- Register your Business with Multiple Listing Directories- Showing that your business is established and relevant is important. List your business with Facebook, Twitter, LinkedIn, Dun Bradstreet, Yellow pages, Better Business Bureau, Yelp, and others. The following is a list of the 55 largest local business directories in the United States https://www.localseoguide.com/best-local-business-directories-seo/. If you want to register to all directories at one time, https//yext.com is a great resource to do so for a nominal fee
- Check public records- Check public records for judgments and/or liens against not just your business but also you or anyone else who owns the business as well. Also, criminal records check on all owners, both County and State.
Consider What Other Business Loan Alternatives Are Available for You Now
Just because a bank turns you down for a business loan or business line of credit doesn't mean the search is over! There are many other products available that may be able to fulfill your need for capital for the Business. Check out AdvancePoint Capital's Business wire, which has a complete guide to other business funding products, "The Small Business Lenders Marketplace: A Complete Guide." Within that guide, you will discover other sources, other than Banks, that after a variety of business loan products. Also, check out "How to Find the Best Small Business Loans" with AdvancePoint Capital, which will provide you a comprehensive list with explanations of how alternative business funding products work and how they may be able to provide the money you need for your business.
10 Alternatives to Bank Business Loans and Business Lines of Credit:
- Small Business Administration Loans (also known as SBA Loans)
- Short-Term Online Business Lenders
- Short-Term Business Lines of Credit
- Merchant Cash Advance
- Business Cash Advance
- Equipment Financing/Leasing
- Invoice/Receivables Financing
- Business Credit Cards
- Personal Credit Cards
- Personal Home Equity Loans
When Denied, Get Educated, and Don't Give Up!
Don't get discouraged when you are turned down at a Bank for a Business Loan. There are other business funding alternatives available, but it's important to understand what those other business loan products are, how they function, and what the qualifications are. Do your homework and get educated as to what options are available and will serve you and your business best.
Work with a Marketplace Business Lender that can offer a variety of products that fit your qualifications and not a lender who is trying to fit your business into their limited product qualifications. Not all alternative business sources are the same. A Market Place Business provider can provide you a lot more choices that allow you to compare, choose, and ultimately save you money. Education and choice equal freedom and opportunities!