The Next 5 Steps to Take After You've Been Denied a Small Business Loan

Let's say you put together a business plan. You did the math to figure out exactly what you needed. You researched your small business loan options, diligently completed the paperwork and even did your little “good luck” dance as you clicked the "submit" button on your application. But then, your worst fears came true: You were denied that small business loan.

Let’s face it: There’s almost nothing quite as discouraging for an entrepreneur as seeing your business dreams halted by the decision of a single lender. You might feel rejected, have no idea what to do next and even start to question whether your grand business plans were ever meant to come true in the first place. But here’s the good news:

Of the many entrepreneurs who are denied a small business loan after their first application, most do go on successfully obtain financing with later applications. The key is to figure out why your application was denied, take steps to improve your credit and financial standing and choose the right loan product for your business – before trying again.

Don’t let a single denial hold you back from pursuing your small business goals! Here are the five steps you can take right now to ensure that your next business loan application results in a resounding yes.

1. Request an explanation from the lender.

Once a loan officer has given your application that red stamp of denial, you're not likely to change his or her mind. Most lenders, however, will be willing to provide a letter of explanation detailing the reasons that your business loan application did not meet their requirements.

Understanding why you've been denied a small business loan will be critical as you seek to successfully re-apply in the future -- and the answer might not be as obvious as you may think. A letter of explanation from your lender will allow you to address those specific concerns before seeking funding again in the future.

2. Check your business and personal credit reports.

If you’ve ever bought a house or a car, or even applied for an apartment lease, you’re likely very familiar with your personal credit score and the impact it can have on your access to financing. But did you know that as a small business owner, that personal credit score also weighs heavily on your access to a small business loan?

That’s why, upon being denied a small business loan, one of your first steps should be to check your personal credit report and score for any discrepancies or forgotten financial woes that may have contributed to the denial.

Be sure to check your credit report with all three major reporting agencies –Experian, Equifax and Transunion -- as different bureaus may receive and report different information about your credit history. Should you find any errors on your credit report, reach out to the agency, in writing, to have the information corrected immediately. You don't want an error to impact your ability to get a loan.

Along with your personal credit, your business also has its own credit report and score, which factors into lenders’ criteria. For most small businesses, however, the challenge of business-credit reporting most often stems from a lack of credit -- particularly if your business is relatively new or you’ve never sought a loan 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 services, including Experian, Dun & Bradstreet, and Equifax.

3. Take steps to improve your business’s financial standing.

While your business and personal credit scores will typically be the most influential factors in a lender’s decision process, the internal financials of your business -- particularly the strength of your annual revenue, cash flow and business savings -- will also be considered.

Taking an objective look at these factors from your lender’s point of view may help you to determine what steps you can take to either improve your financial standing or choose a loan product that will be a better fit.

The best way to do this? Take a look at what’s called your debt service coverage ratio, or DSCR, for short. This simple formula is the tool that lenders use to determine whether your business has the necessary cash flow to make your loan payments consistently and on time.

Don't know what a DSCR is?  Here’s the basic formula you’ll need to calculate your debt-service coverage ratio, including your anticipated loan as part of your calculations:

Annual net operating income + depreciation and other non-cash charges, Divided by interest + current maturities of long-term debt

A debt service of less than 1 indicates that your business’s debt will exceed available cash flow, meaning your loan will surely be denied. Most lenders look for a higher DSCR -- at least 1.25 -- with a ratio of 1.5 or even higher being ideal.

Even if you’ve been denied a small business loan because of a low DSCR, you may not be able to quickly increase revenue or reduce expenses in order to re-apply.

If this is the case, consider seeking a lower amount of funding -- at least at the start -- in order to increase your chance of approval until you can build up your business’s financial standing.

4. Consider alternative loan products.

We can’t say this enough: A denial from one lender on one loan application is not  a “no” for all time. Variations between lenders’ standards, the requirements different loan products have and the amount and terms of your financing can often mean that even without making major changes to your credit or your business finances, you may still be able to obtain a small business loan relatively quickly if you explore your options.

5. Apply carefully the second time.

Beyond the challenges of bad credit or your choice of the wrong business-loan product, there are simple mistakes or oversights on the business loan application that could be the reason you were denied.

Did you have all of the right documents? Did you triple-check your identifying information and every other aspect of the application form for accuracy? Did your balance sheet and profit and loss statements match the business bank statements and tax documents that you provided?

This is the time to get a second set of eyes on everything that you submit so that you don't risk a second round of frustration.

Being denied a small business loan is a reality that many business owners face, particularly after their first application -- but it is by no means the end of your business financing journey.

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When a Small Business Loan Becomes a Strategic Move

A small business loan may be a strategic move. Almost any business may need a loan at some point. At first, this may sound negative. However, there are strategic reasons when your small business should get a loan. Let’s discuss them.

1. To expand operations –

If your business is booming, you may need to add space, people, move to a larger physical location, and even add talent. In this case, a business loan makes strategic sense. The opportunity to expand your business and achieve greater profits outweighs servicing the debt.

2. To Purchase Inventory –

If you have a sizable backlog of orders that you are unable to fill because of limited inventory, this is another strategic reason for getting a business loan. In fact, not doing so may damage your business in the form of lost customers and poor cash flow. This is especially true of small businesses that are seasonal in nature. If, for example, a business makes most of its sales during the holiday season, it makes strategic sense to purchase most of their inventory prior to the holiday season. The opportunity for a successful holiday season outweighs servicing the debt.

3. To Purchase Equipment –

You may need addition equipment to meet increased orders or to expand your product offerings. If you need equipment to meet increased orders, that suggests business is booming. Getting a loan ensures you will capitalize on the opportunity to increase revenue and profit. Not purchasing the equipment may allow a perceptive competitor to offer better delivery terms and shut you out.

If you need to expand your product offering, this is potentially another strategic reason to get a loan. Expanding your product offerings potentially will make you more competitive, in the form of “one stop shopping,” and provide additional sources of revenue.

From a tax viewpoint, getting a loan can be a savvy move. You can take a significant tax write-off the first year and depreciate the rest of the equipment over its economic life. In either case, the additional revenue and tax write-offs associated with purchasing the equipment can outweigh servicing the debt.

4. To Have Working Capital –

Working capital is the money you need to run your business on a day-to-day basis. Sometimes a business may have a significant contract that will yield massive profits. However, the contract terms dictate payment in 90 days or even 120 days after the rendering the service or delivering the product. Often, larger corporations dictate these types of payment terms to small businesses. Put simply, big business is maximizing their cash flow at the expense of the small business. Unfortunately, you still have to pay your employees and other business expenses while you wait for their payment. One answer is a short-term business loan. This strategy will take the stress out of dealing with the payment terms of larger businesses.

5. To Consolidate Debt –

Small businesses incur numerously debts requiring steep monthly payments. If you find your business in a situation of servicing numerous high-interest debts, consider consolidating those into a simple, transparent monthly payment and free up cash flow to run your business.

6. To Pay Business Income Tax –

Many small businesses file their taxes annually. Unfortunately, they may have insufficient funds to cover their taxes. There are numerous ways to deal with this situation. One way is to arrange for a small business loan. This will remove the stress associated with dealing with the IRS and the potential penalties they may impose. However, before you make any decisions, you should consult with your attorney and accountant.

Often, when a small business needs a loan, time is critical. Unfortunately, according to Forbes, you can “Expect to get an answer within two to four weeks.” Other experts state that traditional banks can take 60 to 90 days to approve a loan. This is likely not going to fit your time constraints.

I have done significant research and found one company that understands the financial time constraints of small businesses, namely Lending Club Business Loans. Whether you need $5,000 or $300,000, they can help you in as little as a few days. Get your loan with affordable fixed interest rates with 1 to 5 year terms.

Written By

Louis A. Del Monte

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Seven rules for small-business growth

Ask virtually any small-business owner what they want for their company, and the answer is likely to be “more customers, more money, more business.” In other words, they want their business to grow.

But how exactly do you get your small business to grow?

Like many entrepreneurs, in the beginning of my own business I didn’t really plan for growth. Instead, I responded to opportunities as they came. In fact, I first went in to business by literally bumping into an opportunity. One day, while walking my dog, I met a man who needed a business plan. He was my first client. Twenty-five years later, I’m still dealing with business planning.

But there are big problems with growing your small business opportunistically. Most importantly, you can’t control it or count on it. And opportunities, especially big opportunities, often mean demanding clients that can distract you from building your core business.

Over the years, I’ve come up with a few rules to keep in mind when hoping for and planning small-business growth:

1.  Know what business you’re in.

You may think you know what your business does, but in today’s rapidly changing world, with more competitors, it may be hard to figure out exactly what your strategic position is and how your customers perceive you. Take my small business. We called ourselves a book publishing company. But the world of book publishing has been radically disrupted. We needed to figure out what our customers really wanted from us and understand our core competencies so we could change to survive in this new competitive environment. What are your core competencies?

2.  Take care of your bread-and-butter business first. What business activities actually bring in the money to pay the bills? Never jeopardize these activities, even if they’re not exciting or “sexy.” It’s easy to get bored with your own business – but don’t allow yourself to be. After all, your employees need a paycheck, and your dog has to eat. Look at your financials to see where your sales come from and who your biggest customers are. Taking care of them is your first, though not your only, priority.

3.  Don’t bet all your money on one horse. Many businesses – including my own at one point – have only one or two customers or distribution channels that bring in the bulk of revenue. Being dependent on one or two revenue streams is perilous. It certainly made me nervous at the time, and I knew I had to add new revenue streams to reduce risk, which I did. And that saved my business.

4.  Be clear about your target market. If you don’t know exactly who your customers are, you won’t know what they want and how best to serve them. The biggest problem of most small businesses is they try to serve too large a market. Find a niche and own it. When you try to reach too many customers – or types of customers – you spread your resources too thin and your message gets fuzzy.

5.  Identify exit scenarios. Someday, you’ll want to leave your business – sell it, close it, pass it to your family members. Outline a few realistic exit possibilities and the steps necessary to make those happen. For instance, if you’d like to sell your business, what would make your company attractive to a buyer?

6.  Build one business at a time. Most entrepreneurs have many great ideas and see opportunities to grow in many different directions. But if you try to act on all those ideas – seize those opportunities – at once, you’re less likely to be successful at any one of them. A key rule is to concentrate on only one new direction – product line, target market, distribution channel – at a time. Get that done right, and only then expand.

7.  Choose a strategy you can afford. Growing a business takes money: for marketing activities, new staff, inventory. How will you fund that growth? Through your own revenues? That means growth will be slower. By taking out loans? You’ll have more debt and obligations. By finding an investor? That takes time, and you have to give up part of your company’s ownership. Figure out what kind of financing you can live with, and choose your growth strategy accordingly.

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What to Do If the New Tax Law Changes Your Paycheck

Sometime in February, you might see a change in your paycheck, courtesy of the new tax rules that were all over the headlines before the holidays and which (mostly) took effect on Jan. 1. Here’s what’s going on and what you can do about it.

What’s changing

The amount of tax withheld from your paycheck will probably change at some point in February. The exact timing will depend on when your employer switches to the new tax withholding tables and how often you’re paid. The good news is you’ll likely see a little more money in your check: The Treasury Department estimates 90% of wage earners will see an increase in take-home pay due to the change.

“I think that on average, people will see their paychecks go up by about 1% to 2%,” says Mike Sylvester, a certified public accountant at Small Business Services CPA Group in Fort Wayne, Indiana.

Why it’s happening

Taxes are a pay-as-you-go arrangement in the United States. When you earn money, the IRS wants its cut as soon as possible. That’s why employers withhold taxes from employee paychecks.

Form W-4, which you probably filled out when you started your job, gives you some control over how much is withheld from your check what you put on your  W4 gets funneled through something called withholding tables, which your company’s payroll department uses to calculate exactly how much federal and state tax to withhold. The amount is largely based on your wages, marital status and the number of withholding allowances you claim on your W-4.

The recent tax overhaul changed a ton of tax rules starting Jan. 1, including shifting the tax brackets, increasing the standard deduction and eliminating personal exemptions. That meant the withholding tables had to change, so the IRS reissued them on Jan. 11. It wants employers to start using the new withholding tables no later than Feb. 15.

What to do about it

STAY CHILL

If you see more money in your check in February, don’t start spending it, not even in your mind. After all, your payroll taxes probably aren’t your whole tax picture, Sylvester warns. A new $10,000 limit on the deduction for state and local taxes means that people in high-tax states, for example, might be better off setting that extra money aside until they see where the chips fall when they do their 2018 taxes, he says. Under the new tax rules, you might lose some tax deductions — but you also might move to a lower tax bracket.

THINK AHEAD

Last April, did you get hit with a giant tax bill or, conversely, score an enormous refund? If so, now may be a good time to make a better plan for your with holdings. If you don’t withhold enough throughout the year, you might owe again when you file your return in April 2019. If you withhold too much, you might get another refund — but you’ll live on less of your paycheck in the meantime.

GATHER INFORMATION

Before you whip out a blank W-4 and the calculator, check your with holdings after the changes take effect in February and finish your 2017 tax return so you can see what you have to work with, says Chris Whalen, a CPA in Red Bank, New Jersey. (You can get a sense of where you stand sooner by using a tax calculator.) If you want to change your with holdings at that point, fill out a new W-4 and give it to your employer; you can get the form at IRS.gov or from your payroll people. You don’t have to fill out a new W-4 just because the tax rules changed. But you can change your W-4 at any time you want.

Written By
TINA OREM

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Side hustles you can start with no money

Starting a business is often a pricey ordeal, but no- to low-cost ideas exist for aspiring entrepreneurs with unique and marketable talent. Take inventory of the skills you already possess, recommends Holly Reisem Hanna, founder of career blog The Work at Home Woman. List your past jobs, education, training, passions, skills and talents to help identify vocational patterns and interests that can guide you toward your new business venture.

“In this exercise, you want to go deep,” she says, “so include what you liked and didn’t like about past jobs, training and schooling.”

Need more small business ideas to get the wheels turning? Consider these classic business ideas you can start with no immediate costs.

Consulting and teaching

Your best assets are the knowledge and skills you already have. So whether you’re a math whiz, grammar guru or musical wunderkind, consider selling your well-honed expertise. While you may eventually want to spend a few dollars to get the word out about your services – beyond, say, your social media contacts — you already have the tools you need to get started, which will help keep overhead low.

Manual work

Everyday home maintenance and repairs have a habit of piling up, so if you’re naturally handy around the house, consider positioning yourself as a master of manual labor. Start by specializing in a niche area, like building your expertise in painting or landscaping to help build credibility among clients and not overextend yourself.

Freelancing

More and more companies are looking to freelancers, or independent contractors, to lower their in-house costs, giving creative types – writers, photographers, designers — an opportunity to share their talents with multiple clients.

Pet services

Americans shell out big bucks when it comes to their pets. According to the American Pet Products Association, pet owners spent $66.8 billion on their animals in 2016, with $5.8 billion of that going toward services like grooming and boarding. If pets are your passion, you can start a dog-walking or pet-sitting business for little to no money. Later on, you might take it a step further and become a trainer, though you’ll want to invest in a certification to give your business credibility.

Personal training

Cashing in on the fitness craze is a great idea for the athletically blessed, and there are no required costs for starting out. You can start by working out with clients in public spaces like parks and focusing on body-resistance exercises. Take your hustle to the next level by investing in some gear, like resistance bands or weights, to keep your clients progressing—and coming back to you for more. While there are no state or federal laws regulating who can and cannot declare themselves a personal trainer, a potential cost (and a worthwhile one, at that) is getting certified by an industry organization like the American Council on Exercise. You’ll also want to consider liability insurance to cover any client injuries that may happen while you’re training them.

But entrepreneur beware

Hanna recommends avoiding work in highly regulated industries, like health care, because the guidelines can be hard to navigate. Even outside of tricky industries, there are common pitfalls to avoid when pursuing your side job:

Don’t jeopardize your main hustle. You may need to maintain full-time employment to generate income while your business is getting off the ground. It’s crucial you don’t allocate your best self to your side hustle and phone it in on your regular job. It’s also good to double-check your contract – you don’t want to start a new business only to realize you signed a non-compete clause with your full-time employer.

Look into licensing and certificates. Keeping overhead costs low is important, but there are some corners you don’t want to cut. Even if you’re building a business off of your existing skills, like cutting hair or baking, for example, make sure you follow regulatory guidelines for your industry. If you plan to run your business from your home, check your home insurance policy for what incidents are covered and which ones aren’t, and buy riders accordingly for added protection.

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Why Minorities Have So Much Trouble Accessing Small Business Loans

One of the many long-standing frustrations for minorities is that their vital role in the U.S. economy hasn't made it much easier for them to obtain the means for success. Between 2007 and 2017, minority-owned small businesses grew by 79%, about 10 times faster than the overall growth rate for U.S. small businesses during the same time frame. This puts the number of minority-owned businesses at approximately 11.1 million, which isn’t much of a surprise, considering the U.S. is expected to become a minority-majority country sometime between 2040 and 2050.

But, despite leading a significant portion of the nation's businesses, minority-owned firms are still having a much harder time accessing small business loans than their white counterparts. Minority-owned firms are much less likely to be approved for small business loans than white-owned firms. And, even if they do get approved, minority-owned firms are more likely to receive lower amounts and higher interest rates. According to findings from the U.S. Department of Commerce Minority Business Development Agency, these discrepancies have made minority business owners more likely to not apply for small business loans, usually out of fear of rejection.

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Here are a few reasons why it’s particularly difficult for minority business owners to obtain small business funding:

1. Lower Net Worth

It seems that the most common reason minority-owned firms are

rejected for small business loans is a lower net worth and/or lack of assets. Wealth levels for Latinos and African-Americans are reportedly 11 to 16 times lower than for whites. Data recorded in 2016 found that white business owners start their businesses with an average of $106,720 in working capital compared to African-American-owned businesses, which are started with an average of just $35,205. Banks are traditionally biased against applicants with less money to spare, partially because such applicants probably cannot offer collateral. The lower net worth of minority business owners suggests that they are less likely to own homes or other expensive assets the bank can sell if the applicant cannot pay off the debt. A lack of collateral or higher net worth often makes the bank so worried about being paid back that it is only willing to distribute small business loans that must be paid back as quickly as possible and are therefore insufficient for fostering significant growth.

2. Not The Most Optimal Location

Another major factor in the approval rating of small business loans for minorities is the location of the business in question. A great deal of minority-owned businesses are located in poorer, urbanized, communities. Research from the Small Business Administration suggests that the location of a business plays a bigger role in the approval of a loan than the ethnicity of the business owner. Poorer communities need small businesses to bolster their economies, but big banks do not typically craft their business funding programs with long-term goals in mind.

3. Poor Or Little Credit History

The average minority small business owner has a credit score of

about 707 -- 15 points lower than the average small business owner in the U.S. A nearly perfect credit score is basically mandatory for the most advantageous bank loans, even though there are numerous plausible explanations as to why an otherwise responsible and dedicated business owner would have poor or very little credit history. Still, credit score is arguably just as important as the business’s performance record when it comes to securing a bank loan.

Thankfully in times like this, private funding companies have gained traction by mining data and looking not only at credit but also looking at time in business, industry, location, cash flow, both daily and monthly ending bank balances in the business accounts, number of staff, time left on lease, etc. By looking at more than just credit, these models have allowed minority business owners to access capital.

Exploring Other Options

It’s clear that banks might not be the best option for minority-owned businesses looking for substantial funding. Fortunately, the business lending industry has evolved dramatically over the past decade or so, and small business loans are no longer strictly limited to wealthy white men with flawless credit.

Several alternative business financing companies, for example, do not discriminate based on credit history, net worth or the business’s size. Most of their loans are 100% unsecured, meaning they do not require collateral or a personal guarantee. They lend to virtually every industry, including those that are stereotyped as risky, like retail or hospitality or smaller businesses like Laundromats or convenience stores.

Some alternative lenders even offer programs that are tailored for businesses with less cash on hand and lack the stringent, non-negotiable guidelines of traditional bank loans. These funding companies have allowed business owners to build up their track record and help to fix their perceived problems so that they may one day qualify for the traditional financing they desire.

Two Businesses, One Goal

While almost all alternative business lenders can boast speedy

approvals and loose qualifications, only a few can offer what is arguably the biggest advantage of working with these companies: small business loans that put the borrower, not the lender, first.

Bank loans appear to have been designed with the intent to draw a profit, whereas certain alternative business lenders are more focused on creating loans that are easy to pay off and capable of covering crucial investments. They are aware that their success depends on the success of their clients, so they focus on providing the tools to help them grow over time. Minority business owners would be wise to explore this option if they’ve been rejected by banks and don’t feel like endangering the health of their businesses with loans that might do more harm than good.

POST WRITTEN BY

Jared Weitz

Founder & CEO of United Capital Source LLC 

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