The poor reputation of the business lending industry is largely attributed to the fact that successful and responsible applicants continue to be rejected by traditional institutions. Many of these applicants were previously certain that their strong sales record and loyal customer base would justify a reasonable small business loan, especially after taking precious time out of their busy days to complete the tedious paperwork required for bank loans. Even applicants for online lenders like PayPal and Kabbage are unexpectedly rejected, sapping every last bit of hope of expansion in a new market.
But this is not the end of the road. Actually, you’re not even close. One or a few rejections for small business loans does not mean your business has not earned the right to grow. You just have to know what to do next, and the information you will learn in the process will guide you closer and closer to your goal.
Here’s what to do if you’ve been rejected for a small business loan:
1. Get An Explanation
Don’t bother trying to change your business lender’s mind after you’ve been rejected. You might be nearly certain that a mistake has been made but the business lending industry wouldn’t be perceived so negatively if applicants were frequently able to reason with loan officers. So instead of getting frustrated and wasting your time with fruitless arguments, focus on the next step, which is determining why you were rejected. Most business lenders will explain what it is about your business that gave them the impression you wouldn’t be able to pay off debt according to their guidelines.
This step is crucial because the answer will tell you which areas to address before applying again as well as whether or not you should explore other options for business funding. If you applied for a bank loan, there’s a good chance that fluctuations in revenue, credit score, or your net worth played a role. Applicants for PayPal working capital have said that a high amount of charge-backs or a glitch in the service’s automated algorithm resulted in their rejection, while Kabbage applicants might have been deemed unable to afford the massive initial payments that come with Kabbage’s business line of credit.
2. Improve Cash Flow
There is always more you can do to improve your business’s cash flow. And now that your desired small business loan has been temporarily put on hold, you have more time to cut down on expenses, grind out some extra hours to boost sales, put more money away for savings, or chip away at other outstanding debts. The latter action will likely raise your credit score, which can drop by over 100 points thanks to just one missed payment. If you aren’t sure what to do first, it’s time to do some research and/or get together with your accountant. A decent portion of this research will likely consist of you plugging different hypothetical numbers into your debt service coverage ratio (DSCR), which shows you how much debt your business can afford to pay off based on its current financial standing.
Businesses that feel they are spending too much money might want to look into working with a cheaper energy company, asking vendors for discounts, or outsourcing labor that does not logistically require a full-time, in-house employee. Another way to improve cash flow is to improve efficiency with the use of new tools designed to speed up productivity. But no matter which action you decide to take, you can’t be sure you made the right choice if you don’t keep close tabs on your finances moving forward. All business lenders favor applicants who never say “I don’t know” when asked about anything that pertains to their financial history or projections for the future. Such applicants meet with their accountants and team on a regular basis to discuss how each expense (employees, equipment, marketing) is affecting cash flow.
3. Consider Alternative Business Financing
Alternative business financing emerged following an influx of business owners who felt they were wrongfully rejected for small business loans. Many of these businesses were rejected for the same reasons, so alternative business financing companies like United Capital Source were able to build small business loans around their complaints. Credit score, net worth, industry, and seasonality might have zero impact on your application, and some of their business funding programs are very easy to pay back, even for businesses prone to dips in revenue. Remember, your previous business lender may have rejected you because they didn’t think you could pay off debt on their terms. Alternative business lenders develop terms based on your unique circumstances, such as the need to make significant investments when sales are down.
Need Cash Now? No Problem!
A major reason being rejected for a small business loan is so stressful is because the business in question might have been depending on extra funding to survive an upcoming slow period. Rejected applicants often don’t have the time to work on improving cash flow, raising their credit score or compiling more paperwork. This is one of the aforementioned complaints alternative business lenders kept in mind as they created their small business loans. If you were rejected by another business lender, you could apply for a working capital loan, merchant cash advance, or business line of credit from an alternative business financing company and literally get approved in under two days.
The funding you were depending on to keep your business alive would be in your bank account shortly after, and you wouldn’t have to worry about going bankrupt after your initial repayments. When clients of United Capital Source ask how it is possible to offer such convenient terms, they merely need to be reminded of just how many business owners find themselves in the exact same situation they are in all the time.