You applied for a loan for your business and were declined – what now? Being declined for a loan can be a disappointing and frustrating experience. What steps can a business owner take to make sure it doesn’t happen again?
Understand the reason(s) for the decline. When you ask for a loan you are essentially asking your lender to take a chance that you are going to pay them back. All of the underwriting a lender does is aimed at determining if you have the capacity (enough money) and the will to honor your obligations, and that there is a contingency plan, if things do not work as expected. If you are declined, it is because the underwriter felt you fell short on one or more of these items. If it is not clear from the decline letter, ask your lender to discuss with you what steps you might take to make a stronger application.
Some common reasons for declining a loan are:
- Credit is not strong. Your credit score may show that it is not a good time for you to take on additional debt, either because your current debt levels are too high, or you have not been able to manage your existing debt appropriately (i.e. you have late or missing payments). In this case, you may benefit from credit counseling to determine how to lower your debt load and/or manage your debt responsibilities better. An excellent resource is GreenPath Debt Solutions, a not for profit debt counseling agency: 877 428 1113.
- Insufficient cash flow. When taking a look at the cash flow in your business, your lender may determine that there is not enough cash flow to make the monthly payments your loan would require. It may be helpful to consult with a business advisor to see if there is a way to increase sales and/or reduce costs for your business so you are in a position to take on debt. Lenders generally assess your business based on the results shown on the tax returns you file – speak to your accountant or tax preparer before you file and let them know you will be applying for credit. Also, the Small Business Development Center, SCORE and the Women’s Enterprise Development Center are all sources of free and low cost small business assistance.
- Insufficient collateral. Your lender may have no doubt as to your integrity and your intention to repay the loan, however, sometimes things happen that are beyond the borrower’s control and that is why lenders look for a means to be repaid, even if the business is unable to provide the cash. Collateral can take many forms including co-signers, wholly owned vehicles, cash, mortgages and even jewelry. If you do not have any of these things, you may be unable to secure a loan at this time or you may need to reduce the size of your ask to reflect your limited collateral.
- Insufficient Business Plan. Your business plan is the roadmap for your business. As your loan officer reviews the plan and has discussions with you about your business, they are looking for a clear indicator that your business is viable and will be successful. In case of a decline, they may not feel that you fully understand your business operations, or have not sufficiently researched your target market and laid out a clear path to success. You may need some additional research, planning and assistance to help you think through your plan and ensure that the business is going to survive and be profitable. Again, there are wonderful resources available to assist you with your business plan. The Small Business Development Center, SCORE and the Women’s Enterprise Development Center are all sources of free and low cost small business assistance.
As disappointing as it is to receive a decline, also keep in mind that debt might not always be the right solution for you or your business at this particular point in time. While capital can help a business to start and grow, debt creates a significant burden and an obligation to repay – if your lender declined you it might be time to step back and evaluate your situation following the outline above.