Turn a small business loan denial into an approval…

This is an article authored by Meridith Wood, that we believe every business can benefit from. Particularly those businesses that have been previously denied a loan.  

“So your loan application has been denied.

First step: Breathe. Application denials happen all the time — it doesn’t necessarily mean the end of your relationship with this particular lender.

Lenders often reject applications if they need more information or require you to change a few key portions. Aside from omissions, other common rejection causes include poor credit scores (both personal and business), cash flow concerns, inadequate collateral and applying for types of loans (e.g. a line of credit) that aren’t a good fit for your needs.

There might be parts of your business that need your attention, but have gone under the radar in the flurry of day-to-day operations. We’ve put together this list of recommendations below (and some useful tools) in order to help you turn that “No” into a “Yes.”

Get all of the information

We hope it goes without saying, but be sure to keep careful records of all of your documentation relating to your loan application(s). In the event of a dispute, you’ll definitely want to have those documents on hand.

Some lenders might provide you with the reason for your rejection straight away, but others might come back with a simple “No.” If that’s the case, don’t fret. The Equal Credit Opportunity Act (ECOA) requires lenders to tell you why your application was rejected.

Pro tip: If you’re not immediately informed as to why your application was rejected, you can request more information within 60 days of the rejection notice.

Re-submitting your application

Lenders’ re-submission practices and preferences vary. Be sure to check with your particular lender to ensure you’re following their protocol.

We hope you triple checked your application for errors and omissions, but keep an eye on this helpful checklist from the U.S. Small Business Administration (SBA). It will help you as you move forward with your re-submission, as well as any future applications.

Protect yourself

The ECOA also protects you against credit discrimination — if you feel you’ve been discriminated against in any way, don’t keep it to yourself.

The Federal Trade Commission (FTC) has a more rigorous overview of ECOA protections on their website (and lots of other useful tools), but here are a few key factors that lenders cannot take into account when evaluating your application:

1. Race
2. Color
3. Religion
4. National origin
5. Sex (Gender)
6. Marital status
7. Age
8. Receipt of income from any public assistance program

Visit the FTC’s site for more information on how to protect yourself against credit discrimination.

Adjust your expectations

It’s true that some rejections can be reversed quickly if you’ve merely left out some important required information. With that said, addressing deeper concerns that arise in a rejected loan application can take months or years.

If it’s an issue with your cash flow, for example, you might need to work to reduce expenses or increase your revenue in order to make your application more attractive. Remember — a rejection is a chance to reevaluate your business. If there’s an unprofitable area that you’ve kept afloat, now might be the time to shut down that avenue and focus your resources on what’s really working.

Consider alternative lenders

It’s harder than ever to get a small business loan from the bank. Luckily, alternative lending has grown enormously over the last 10 years. With solutions like peer-to-peer lending, more and more small business owners are seeking different methods for acquiring funds.

Pro tip: Be open minded. You might find that lenders you haven’t considered are more attuned to your business’s mission or goals than local or big-name banks.

Check your credit score

If your lender cites “credit score” as a key reason for denying your application, be sure to ask what score appeared during their check.

Although it’s rare, lenders might have received a faulty report after running your credit. So if you notice any discrepancies between the score you expect and what they have on file, let them know immediately.

Your business’s credit is important, obviously, but a loan denial is a good time to reevaluate your personal credit as well. Your personal credit score helps lenders evaluate your likelihood to honor your contract and make your payments.

Think like a lender

While you might have dozens of reasons why you think your business will flourish in the coming months and years, lenders tend to be more pragmatic.

For example, you might be betting on a huge influx in customers when a new housing development or public transportation station opens. But if your cash flow shows that you’ll have trouble making your payments in the short-term, lenders will likely turn you down.

Pro tip: A quick and easy trick to evaluate your ability to handle loan payments is to check your Debt Service Coverage Ratio (DSCR).

Lenders want to know that you can service your debt, so your DSCR is a big factor in evaluating your application. Here’s how to calculate the DSCR for your business:

Cash Flow / Loan Payment = DSCR

A DSCR below one signals that you don’t have enough (or won’t have enough) cash on hand in order to make your monthly payment(s). That’s a huge red flag for lenders, so if you find yourself in that territory, make sure that you’re working to boost your cash flow and therefore your ability to manage your debt.

The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.”

5 Tips to Improve Your Odds of Getting a Small Business Loan…

This is an article authored by Anna Johansson, that we believe every business can benefit from. Particularly those businesses interested in obtaining financing. This is her article, in its entirety, and word for word…

“In a perfect world, every entrepreneur would have the resources necessary to transform a killer business idea into a smashing success. However, as you know by now, that’s not how it works.

In fact, having a great idea is only part of the equation: At some point, most entrepreneurs need a small business loan. Unfortunately, however, getting approved for a loan can be challenging if you don’t have all of your proverbial ducks in a row.

Five tips for getting approved

When it comes to getting a small business loan, you have to put yourself in the shoes of the bank or financial institution that you’re interacting with. If you were in their role, would you feel confident loaning money based on the set of circumstances and factors an applicant provided, and the interview process? Once you flip the script and look at things from their perspective, you should be able to see your situation in a less biased light.

That being said, here are a few tips for getting approved.

1. Start the process asap.

You aren’t going to walk into your local bank, fill out an application, and get approved for a loan on the spot. The approval process can take weeks, if not months to unfold. That’s why it’s best to start the process as soon as you can. Don’t wait until you need the money or you may end up with your back against the wall.

2. Deal with your credit history.

While you may desire separation between your business and personal finances, lenders will factor in your personal credit history when determining your risk level as a borrower — there’s simply no way around it.

If you’re worried about this part of the process, focus on some ways to improve your credit score. According to Credit Sesame, your credit score is made up of the following five factors: payment history (35 percent), credit utilization (30 percent), credit age (15 percent), account mix (10 percent) and credit inquiries (10 percent).

As you can see, payment history and credit utilization make up the bulk of your score. By paying bills on time and using less of your approved credit line, you can bump your score up a few points in a matter of months. Realistically, you’re going to have trouble getting a small business loan from a traditional lender if you have a score of 660 or lower. Ideally, lenders want to see a score of 720 or higher.R

3. Have a detailed plan for using the money.

When speaking with a lender, be very clear about how the money will be used. Giving some vague or general response about growing your business isn’t going to work. The lender will want to know exactly how the money will be used in order to determine the feasibility of your application.

Every business is different, but a few of the smartest ways to use a loan include an inventory purchase, business expansion, administrative expenses and capital investments. You may also choose to refinance or pay down debts, but lenders won’t always look at these uses with high regard.

4. Be organized and over-prepared.

Organization plays a key role in whether or not you’ll be approved for a small business loan. If the lender asks for a specific piece of information, you need to be capable of providing it in a timely manner. A lack of organization shows that you’re unprepared and risky.

The best thing you can do is over-prepare ahead of time. By having ready every possible piece of information or documentation that your lender could want, you can wow him or her with your efficiency, and take control of the process.

5. Get advice from experts.

Asking a lender for $100,000 to grow your business is one thing. But totally different is setting up a meeting and explaining that you’ve met with your financial advisor, accountant and board of directors, who have determined that you need $103,000 to expand your production facility and lower your cost of goods sold.

As mentioned, lenders want to see a specific plan. They also want to know that you aren’t acting alone. They like to see that you’re communicating with experts in your field and fully understand the situation.R

Improve your odds.

Getting approved for a small business loan is no easy feat. The burden of proof is on you to convince the lender that you’re worth the risk associated with lending money. Put yourself in these people’s shoes and think about how you look. Be sure to address your shortcomings and highlight the positives to improve your odds of being approved.”

5 Main Reasons Banks Turn Down Small-Business Owners for Loans…

This is an article authored by John Rampton, that we believe every business can benefit from. Particularly those businesses interested in obtaining financing. This is his article, in its entirety, and word for word…

It was never easy for smaller businesses to get loans when they needed them most and it has only gotten harder since the recession.

You were counting on that small business loan to help your business grow, but the bank said “no.” If it makes you feel any better, you’re not alone.

Over the last couple of years, large banks have been reducing the amount of loans that they’re issuing to small businesses. The Wall Street Journal reports that it may be because of, “Weak demand, tighter lending standards and high costs have put a lid on small business borrowing” following the 2008 economic crisis.

However, getting rejected is never fun, even if the circumstances are out of your control. That’s why you should know exactly why your loan was rejected in the first place so that you can make sure that it never happens again.

Sometimes a bank will share these details, but if not, I find that it’s typically for one or more of the following five reasons:

1. Bad credit

Credit history is one of the first things that lenders will review when going over a business loan application. A good credit score proves that the business owner has properly managed both of their personal and business finances by avoiding bankruptcy and making all of their payments on-time.

A poor credit score, however, can make lenders wary since it demonstrates that the individual can not make well-informed financial decisions and are unable to meet the financial obligations that are included in the loan agreement. This is even the number one reason why a payment processor like myself will reject you and your company from even accepting payments.

The good news is that you can repair your low credit score by paying your bills ontime, getting your credit card balances under control (not cancelling your cards) and repairing any mistakes that appear on credit reports. Keep in mind, bad credit on either the business owner or the business can impact the business getting a loan. Here are a few other credit myths I’ve put together that you should know about.R

2. Weak cash flow.

“Banks are very concerned that businesses have enough cash flow to make monthly loan payments in addition to covering their payroll, inventory, rent and other expenses,” says Warren Lee of TheLendingMag Media Group. “Unfortunately, many startups and small businesses struggle to keep enough money in their bank accounts even when they’re profitable, often because they have to pay 3rd-party suppliers upfront before they get paid for their product or service.”

By creating a sticking to a budget, small business owners will have a better idea on how much cash is coming and going through your business operations. If you notice that there is a weak cash flow then you need to cut expenses and find ways to bring-in some extra so that banks won’t reject your application.R

3. Time in business and limited collateral.

For new small business owners, obtaining a bank loan may seem like one of the best ways to jump-start your business, or at least get you through your first trying year. Amy Blatterfein points out in an article for Ventury Capital, “Loans for those situations do exist. But, you are not going to find them at your local bank. If you’re looking for a traditional simple interest business loan with a monthly payment you’re going to need to be in business for at least two years.”

You may even have difficulty qualifying for this type of loan until you’ve been operating for at least three years. The reason? Traditional loans require two full years of tax returns to prove consistent gross and net profits. Additionally, small businesses that are just starting out often don’t have the collateral, such as equipment or real estate, required if your business ever defaults on the loan.

You may have to look for alternative sources of funding, such as peer-to-peer lenders, crowdfunding, or online merchants, if you just started your business. As for collateral, you can use personal assists like your home or vehicle.R

4. Lack of preparation

“Many businesses simply aren’t savvy about the application process and believe they can walk into a bank, fill out an application and get approved for a loan,” says Mark Palmer, managing director and analyst at BTIG.

Prior to applying for a bank loan, the Small Business Administration suggests that you have a written business plan, financial statements or projections, personal and business credit reports, tax returns, and bank statements. Also included should be copies of legal documents, which include articles of incorporation, contracts, leases, or any licenses and permits that you need for your business to operate.R

5. Outside conditions

What if you have a solid credit score, strong cash flow, collateral and have prepared everything you need for loan, but are still turned down? It could be no fault of your own. It may just be outside conditions that are out of your control.

“Outside influences are always considered prior to a loan approval or decline,” says Diane Roehrig, president of Alacom Finance. “They can include industry experience (do you have the work background to manage your own business), a business’s location, local or regional economic trends, competitors.”

Furthermore, Roehrig says that there are local, state, and federal ordinances, along with factors like, such as local climate conditions, that could influence an applicant’s approval or denial.

Banks are just more cautious since the 2008 recession, in part because of regulations about lending money to businesses that are considered risks. Unfortunately, this includes small businesses since they don’t have the proven track record of established or larger businesses.