May 14, 2018 By Suzanne Robertson

If you’ve decided to take out a small business loan, you’ve likely put lots of time and energy into deciding on an amount, choosing a lender, and producing paperwork. If you get rejected, don’t feel defeated! Many business owners who are initially denied after a first attempt are successfully funded down the road. What’s important is to figure out why you were turned down and take action to improve your situation before you apply again.

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6 steps to take after being declined for a small business loan

Being declined for a small business loan isn’t the end of the road. Often, denials result from you not fitting one of a lender’s very specific criteria rather than being not worthy across the board. For example, some working capital loans might require a certain amount of time in business that’s not a factor at all with other loans. And some loans might not care about your poor credit history as long as your business finances are great. Here are the next steps you can take to help turn a “no” into a “yes.”

1. Speak with the lender

You probably won’t be able to successfully negotiate a “yes” once you’ve been turned down. But there’s no reason to be in the dark. Reach out to your lender and request a letter of explanation. The lender should comply and outline the reasons you weren’t able to be funded at this time. Once you know details, you can work on strengthening your business profile to improve your chance for approval in the future.

2. Check your personal credit score

Some business owners are surprised to discover that personal credit scores are important when trying for a business loan. Lenders want to know that you can make payments in full for the life of the loan. Your personal credit score is seen as a reflection of how you handle financial obligations.

When you check your credit score, you might find errors in your report. These might be outstanding debts you’ve already paid or transactions that simply never happened. You should take a close look at each major credit bureau’s report on you and your business to find these errors. Some errors might only appear on one report, whereas others might appear with all three bureaus. Contact the relevant agencies to demand a correction.

In some cases, clearing credit history errors is all it takes for your small business loan application to go through just fine the second time. A complete, error-free credit report may also open your business to other financing options that your error-filled report blocked.

3. Check your business credit score

For most small businesses, the problem with business credit reports is a lack of credit. This is particularly true if your business is relatively new or you’ve never taken a loan out before.

Work to build up your business credit by asking vendors, creditors or even the landlord of your retail property or office space to report your payment history to major business credit reporting agencies.

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4. Stick with the best loan

SBA loans are generally known as the “gold standard” in small business loans. If you qualify, SBA loans with low interest rates, long terms and very low monthly payments are the best way to fund a small business. The high volume of documentation required to apply is typically well worth the borrower-friendly funding.

You might be tempted to go for a quick, online loan to get fast cash. Stop and consider that these types of loans often have sky high rates with very short payback terms (think less than a year for some).

If you must access less-than-ideal funds quickly, make sure you can easily make payments for the life of the loan. Alternatively, you can seek out business credit cards of business lines of credit. With these funding sources, you’ll only pay fees on the money you actually use. That’s important – late payments or a default can lead to additional costs that disrupt your cash flow. They can also seriously impact later applications for lower cost funding.

5. Assess the overall health of your company

In addition to checking business and personal credit scores, banks look at a number of financial ratios. For example, the debt-service coverage ratio (DSCR) measures your business’s cash flow and ability to pay debts. To calculate it, divide your net operating income by the total amount of debts you’ve accumulated. The resulting number is essentially a score based on how well your income can cover your debts. Most banks look for a DSCR of at least 1.0 – a great indicator of a healthy company.

Lenders will also check your FICO SBSS credit score. This FICO score is different from your personal FICO score. It only goes from 0 to 300, and it requires your personal and business credit history to calculate. The higher the score, the better your business’s financial health.

6. Take steps to improve your financial standing

Improving your financial standing often means improving your business’s financial health numbers. Doing that can be time-consuming but simple. For instance, improving your DSCR starts with taking on less debt and paying off your current debts. It also involves cutting back on unnecessary expenses to increase your net income, alongside other methods of boosting revenue.

A good FICO SBSS credit score is dependent on the same factors as a good personal credit score. Keeping it in good standing means making regular monthly payments on your loans. When paying off your loans, make sure to focus on loans with high interest rates first so you don’t get buried underneath increasingly more debt. You can also contact vendors you’ve worked with and ask them to report your history of timely payments to the credit bureaus. Doing so can build good credit for your business.

Find suitable loans with SmartBiz®

While being declined for one loan can be discouraging, there are many other options available. As long as your financial documents are in order, you might have at least a shot at qualifying for other loan packages. You can use SmartBiz to explore these other options. If you’ve been declined for an SBA 7(a) loan or bank term loan, check now whether you pre-qualify* for custom financing options. These are often easier to qualify for, and they can be just as meaningful for your business – today and in the long run.

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