If your application for a business loan is denied, don’t be shocked. Contrary to popular assumption, banks cannot take a chance on a successful business without adhering to tight regulations. No matter how promising the business is, they are prohibited by banking law from lending without collateral.
A successful business does not end with the first rejection, though. What you do following the loan denial is crucial. Here are the specific actions you need to perform.
Find out the reason
Examine the reasons behind the loan denial. Be careful to follow up with a specific individual; don’t just use a form letter or secure message. Do some investigation to find out who the loan manager is if you don’t already know them.
It doesn’t follow that you should disregard a form letter, especially if it provides you with an explanation. Pay great attention to the details provided in the rejection on issues like collateral or financial position.
Ask about what could have been different and which credit agencies the banks refer to, and so on. Remember, you’re looking for feedback to fix the issues and not trying to undermine anyone’s decisions.
Improve cash drivers
Back to the basics: sell more, make more cash sales than credit sales, get rid of unneeded or outdated inventory, and encourage your clients to pay their bills more swiftly. You might be running a significant campaign to boost sales or give customers who pay on time a discount.
New sales will increase financial ratios and credit scores while also providing cash to settle debts.
Change strategies and lenders
You might wish to look into alternate lenders if your figures aren’t too bad and you don’t understand why your bank rejected your loan application. Banks compete for the business of small businesses, and occasionally a questionable case can be approved by another bank.
Make sure to correctly set the stage if you try that. When you speak with the following bankers, be open and honest about your circumstances. Don’t stretch the truth because they chat to one another.
Additionally, you can think about seeking venture debt. Where you take out a loan from venture capitalists or angel investors who are prepared to lend money to entrepreneurs in exchange for higher interest rates and frequently also an equity kicker.
Revisit the business plan
Sometimes the denial of your bank loan has no obvious cause. If so, you might have to start from scratch. And for that, you may have to go back to the business plan and make some changes.
You might need to grow more slowly. Narrow your emphasis to a few key areas of your organization to increase profitability. Risky debt, healthy financial ratios, and the potential need to focus on improving the company without increasing revenue are all factors to consider.
Explore other options
You might discover that getting finance from a conventional bank won’t be possible. Perhaps you haven’t borrowed much in the past, or you don’t have enough sales to demonstrate the viability of your company. In that situation, looking into different financing solutions might be worthwhile.
A loan rejection may set you back for a while. But many startups go through the same ordeal. You just need to regroup and decide on what to do next.